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Owning Individual Real Estate Investment Trusts (REITs) vs REIT ETFs

Building an indexed diversified portfolio has never been easier and cheaper for investors.  If you like to put your portfolio on autopilot, you can buy a single all-in-one ETF that will even re-balance your stock bonds automatically, all while charging very low fees. 

Related: All-in-one ETF Battle: Vanguard vs iShares vs BMO

All you need to do is regularly deposit your savings and buy the single ETF on a regular basis – and it can get even cheaper if you use a discount brokerage that eliminates trading fees on ETF purchases.

However, these indexed products rarely include a material amount of real estate holdings. The easiest way to get real estate exposure in your portfolio is through a real estate investment trust (REIT).

There are merits to holding REITs in your portfolio, first for the distributions, second, for the reduced correlation to regular equities.  In addition, it’s 100% hands-off, where you let a professional management team take care of the properties and growth of the company.  Finally, you can sell a REIT very quickly if you needed the cash (liquidity) whereas selling a piece of property directly would take time and money.

Backgrounder on REITs

Real Estate Investment Trusts or REITs are companies that invest in real estate assets and distribute their income (primarily from rent) to their shareholders. The distributions are usually in portions of dividends, return of capital, and income.

Equity REITs can be purchased like any other public company/stock through the stock market. If you are interested in REITs, and you haven’t opened a discount brokerage account yet, check out my review of Canadian discount brokerages.

As you know, there are many types of real estate investments, and there are REITs that cover them all.  They can range from residential rentals, hotels, superstore leasing, apartment buildings, and seniors housing.

REIT ETFs and Holdings

Perhaps the easiest way to own a portfolio of REITs is through a REIT ETF.  There are three popular REIT ETFs in Canada as shown below, but the issue is that the REIT market is fairly small.  So each ETF, while charging a fairly hefty MER, will only have a limited number of holdings.

iShares S&P/TSX Capped REIT Index ETF (XRE)

  • Holdings: 21
  • MER: 0.61%
  • Top 10 Holdings:
    • REI.UN RIOCAN REAL ESTATE INVESTMENT TRUS 13.56%
    • CAR.UN CANADIAN APARTMENT PROPERTIES REAL 13.41%
    • HR.UN HANDR REAL ESTATE INVESTMENT TRUST 11.05%
    • AP.UN ALLIED PROPERTIES REAL ESTATE INVE 9.66%
    • SRU.UN SMARTCENTRES RL ESTATE INVESTMENT 7.11%
    • CHP.UN CHOICE PROPERTIES REAL ESTATE INVE 6.09%
    • GRT.UN GRANITE REAL ESTATE INVESTMENT STA 5.23%
    • DRG.UN DREAM GLOBAL REAL ESTATE INVESTMEN 4.69%
    • CUF.UN COMINAR REAL ESTATE INVESTMENT TRU 3.92%
    • KMP.UN KILLAM APARTMENT REIT UNITS CLASS 3.11 %

Vanguard FTSE Canadian Capped REIT Index ETF (VRE)

  • Holdings: 18
  • MER: 0.39%
  • Top 10 Holdings:
    • REI.UN RIOCAN REAL ESTATE INVESTMENT TRUS 12.95%
    • CAR.UN CANADIAN APARTMENT PROPERTIES REAL 11.45%
    • HR.UN HANDR REAL ESTATE INVESTMENT TRUST 10.63%
    • AP.UN ALLIED PROPERTIES REAL ESTATE INVE 8.43%
    • SRU.UN SMARTCENTRES RL ESTATE INVESTMENT 6.8%
    • FSV FIRSTSERVICE CORP 6.29%
    • FCR FIRST CAPITAL REALTY 5.51%
    • CIGI COLLIERS INTERNATIONAL GROUP 5.46%
    • CSH.UN CHARTWELLS RETIREMENT RESIDENCES 5.24%
    • CHP.UN CHOICE PROPERTIES REAL ESTATE INVE 5.135%

BMO Equal Weights REITs Index ETF (ZRE) 

  • Holdings: 23
  • MER: 0.61%
  • Top 10 Holdings:
    • SMU.UN SUMMIT INDUSTRIAL INCOME REIT 5.19%
    • KMP.UN KILLAM APARTMENT REIT 4.82%
    • CRR.UN CROMBIE REIT 4.81%
    • DIR.UN DREAM INDUSTRIAL REIT 4.81%
    • NWH.UN NORTHWEST HEALTHCARE PROPERTIES REIT 4.69%
    • AX.UN ARTIS REIT 4.63%
    • CUF.UN COMINAR REIT 4.63%
    • CRT.UN CT REIT 4.61%
    • CSH.UN CHARTWELLS RETIREMENT RESIDENCES 4.58%
    • IIP.UN INTERRENT REIT 4.54%

Owning Individual REITs

If you look over the holdings above, you may notice that the top 10 holdings are a very large percentage of the entire ETF – which adds to the case of owning individual REITs over the ETF.

  • iShares S&P/TSX Capped REIT Index ETF (XRE): 77.83%
  • Vanguard FTSE Canadian Capped REIT Index ETF (VRE): 77.9%
  • BMO Equal Weights REITs Index ETF (ZRE): 47.31%

Even the top 5 holdings are significant:

  • iShares S&P/TSX Capped REIT Index ETF (XRE): 54.79%
  • Vanguard FTSE Canadian Capped REIT Index ETF (VRE): 50.26%
  • BMO Equal Weights REITs Index ETF (ZRE): 24.32%

In addition, as previously mentioned, the MERs are high for a small number of holdings.  If you held $10,000/$30,000/$50,000 in each of the REIT ETFs, this is how much it would cost you per year:

  • iShares S&P/TSX Capped REIT Index ETF (XRE): $61/$183/$305
  • Vanguard FTSE Canadian Capped REIT Index ETF (VRE): $39/$117/$195
  • BMO Equal Weights REITs Index ETF (ZRE):$61/$183/$305

Putting it Together

Due to the higher MERs and heavy weightings in the top 10 positions, my preference is to hold individual REITs over owning REIT ETFs.  By owning 5-10 positions within the index of your choice (I personally prefer following the capped REIT index like XRE and VRE over the Solactive Equal Weight index that the BMO product follows), your own REIT portfolio will track the index relatively closely all while saving money over the long term.

You may be thinking what about the trading commissions.  Best bet would be to sign up with a low-cost brokerage and add to these positions in larger tranches.  So purchasing 8 positions at once, would result in approximately $40 in trading fees with Questrade (my review here). The beauty is that it’s not a recurring fee like the MERs quoted above.  The larger your portfolio, the more you will benefit from owning individual REITs over the equivalent ETF.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 12 comments… add one }
  • Avatar Bernie July 29, 2019, 4:19 pm

    Good article but IMO “First Asset Canadian REIT ETF (RIT)” is the top REIT ETF in Canada now and has been for several years.

    • FT FT July 29, 2019, 7:49 pm

      Thanks Bernie I will take a look !

    • Avatar Spock September 21, 2019, 11:10 am

      It’s been hands down the best REIT etf in Canada mainly due to the difference in holdings composition as well as the concentration.

      Having RIOCAN as the top and huge holding for the other ETF’s has been a downer but RIT is actively managed unlike some of the others.

  • Avatar Jeannie July 29, 2019, 7:58 pm

    Informative. I prefer to hold individual REITs as well and have been happy with much higher dividend yields.

    • Avatar Hovert Patel August 3, 2019, 12:24 pm

      Hi Jeannie
      Can you please let me know name of good Reits giving good yield
      Thanks
      Hovert

  • Avatar J July 31, 2019, 12:02 pm

    $50k in VRE with an MER of 0.39% would cost $195/year rather than $305/year.

  • Avatar Executive Investor July 31, 2019, 2:05 pm

    I also prefer holding individual REITs. I’m on my way to become FIRE (6 months and counting!) and 1/3 of my Passive Income is coming from REITs.

    • FT FT July 31, 2019, 9:30 pm

      Wow, congrats on your financial success! Would you mind sharing some of your favorite REITs?

      • Avatar Executive Investor August 1, 2019, 12:00 pm

        Here you go, my favorite REITs.
        – American Hotel (HOT.UN)
        – BTB Real Estate (BTB.UN)
        – True North Commercial (TNT.UN)
        – Northwest Healthcare (NWH.UN)
        I have around 10 REITs in my portfolio , but I’m planing to diverse a little bit more to around 15. What’s your suggestion?

  • Avatar MaxB August 1, 2019, 11:41 pm

    If you take the percentages from above and just sum up ….

    26.51% REI.UN
    24.86% CAR.UN
    21.68% HR.UN
    19.10% SMU.UN
    18.09% AP.UN
    11.23% CHP.UN

  • Avatar MaxB August 1, 2019, 11:44 pm

    If you go based on MarketCap, you get

    BAM.A 64b
    BPY-UN 24b
    REI-UN 8B
    CAR-UN 8B
    HR-UN 7B

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