ZRE vs. XRE: Which REIT ETF is the Best Buy for Canadian Investors?
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Welcome to a series where I break down and compare some of the most popular exchange-traded funds (ETFs) available to Canadian investors!
Investors excluded from Canada’s booming real estate market can simply buy shares of various real estate investment trusts (REITs). Both black rock and BMO Global Asset Management provide a set of low-cost, high-liquidity ETFs that provide exposure to a portfolio of REITs from all sectors, including residential, office, industrial, healthcare and retail.
The two tickers to look at today are ETF iShares S&P/TX Capped REIT (TSX: XRE) and BMO Equal Weight REIT ETFs (TSX: ZRE). What is the best option? Keep reading to find out.
XRE vs. ZRE: Fees
The fees charged by an ETF are expressed as a management expense ratio (MER). This is the percentage that is deducted from the net asset value (NAV) of the ETF over time and is calculated on an annual basis. For example, an MER of 0.50% means that for every $10,000 invested, the ETF charges a fee of $50 per year.
XRE has an MER of 0.61%, the same as ZRE. ETFs are therefore tied in terms of their fees, with both costing you $61 per year on a $10,000 portfolio. It’s slightly more expensive than directly owning a REIT portfolio, but it saves you the trading fees associated with rebalancing.
XRE vs. ZRE: Size
The size of an ETF is very important. Funds with small assets under management (AUM) may have low liquidity, low trading volume, high bid-ask spreads, and increased risk of being delisted due to lack of interest.
XRE attracted an AUM of $1.26 billion, while ZRE has an AUM of $780 million. While both are sufficient for a buy-and-hold investor, XRE is currently the most popular ETF among Canadian investors.
XRE versus ZRE: holdings
XRE follows the S&P/TSX Capped REIT Index, which tracks the performance of 19 TSX-listed REITs, each capped at a maximum weighting of 25%. XRE’s top five holdings include Canadian Apartment REITs, RioCan REIT, Granite REIT, Allied Properties REIT, and Choice Properties REITwhich together account for around 48% of the ETF due to their large market caps.
ZRE follows Solactive Equal Weight Canada REIT Index, which tracks the performance of REITs listed on the TSX. The ZRE is divided equally between 23 farms at about 4% each. ZRE contains the same top five holdings as XRE, but at much lower weightings. Therefore, REITs with small market capitalization benefit from the same allocation as larger ones for better diversification.
Investors typically hold REITs for the passive income potential, so we also need to look at their distribution yield. Currently, ZRE is paying a yield of 3.87% versus XRE at 3.41%. While both are respectable, the win goes to ZRE on this one.
XRE vs ZRE: historical performance
A word of caution before diving in: past performance is not indicative of future results, which can and will vary. The portfolio returns presented below are hypothetical and retrospective. Returns do not reflect trading fees, transaction fees or taxes, which may result in drag.
Here are the flashbacks from 2011 to today:
Here are the annual returns from 2011 to present:
ZRE has surpassed XRE over the past decade. I attribute this to ZRE’s equal weighting, which reduced the risk of a single large holding dragging its performance. XRE is far too concentrated with 48% of its holdings in just five REITs, which makes it more volatile, especially during crashes.
The insane takeaway
If I had to pick one ETF to buy and hold, it would be ZRE. Both ETFs have identical MERs, XRE has more assets under management, but when it comes to holdings, I feel more comfortable buying an equally weighted ETF. When I buy a sector-specific ETF, I want to own the sector and not just a few select companies. For this reason, ZRE is my choice for betting on the TSX REIT sector.