For real estate investors, I often recommend choosing a real estate investment trust (REIT) exchange-traded fund (ETF) over individual REITs, and there are two main reasons for this preference.
First, a REIT ETF offers greater diversification. With one investment, you get exposure to a variety of REIT sectors, including residential, commercial, healthcare, and industrial properties. This variety helps spread risk.
Second, investing in a REIT ETF makes managing your investment easier. Instead of keeping track of multiple tickers and managing dividends from each, the ETF manager handles the rebalancing and distributions for you. Most REIT ETFs distribute income monthly, offering a regular income stream.
With many REIT ETFs available, choosing the right one can seem overwhelming. In this guide, I’ll show you how to pick between them and share the REIT ETF that I believe is the best option to invest $1,000 in right now.
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Picking between REIT ETFs
When choosing a Canadian REIT ETF, the first decision you should make is whether you prefer a passively or actively managed fund. What’s the difference?
A passively managed REIT ETF aims to replicate a benchmark index, such as the S&P/TSX Capped REIT Index, mirroring its holdings and performance.
An actively managed REIT ETF, however, involves a manager or management team making decisions about which REITs to include based on their own research and strategy.
Generally speaking, passive indexing tends to offer better returns over time. One big reason for this is cost—passively managed funds typically have lower fees than actively managed ones.
For those interested in passively managed REIT ETFs, the methodology of the index is also important to consider.
Many REIT indexes in Canada are market-cap weighted, meaning that larger REITs occupy a larger percentage of the index.
This can lead to a concentration where a few large REITs might dominate the ETF, sometimes making up 10-16% of its total weight each. This concentration can impact the fund’s volatility and performance.
Alternatively, an equal-weighted REIT index distributes its holdings more evenly. If the index holds 20 REITs, each one is assigned an equal weight of 5% at each rebalance, regardless of the company’s market size.
This approach can help reduce the risk of overexposure to any single REIT and potentially lead to more stable returns across various market conditions.
My favourite REIT ETF
My favourite REIT ETF is BMO Equal Weight REITs Index ETF (TSX:ZRE). Priced at around $20 per share, it’s quite affordable.
This ETF employs the equal-weighting methodology I mentioned earlier, which I believe offers a more balanced approach to investing in the real estate sector.
Currently, it includes 22 holdings, providing diversified exposure across different REITs without overly concentrating on the largest ones.
With an expense ratio of 0.61%, ZRE offers an attractive annualized yield of 5.4%, with distributions paid monthly.
