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moneysense.ca, 11/07/07
A Tour of ETFs: iShares CDN REIT Sector Index Fund
A Real Estate Investment Trust or REIT is an asset class that allows you to get exposure to real estate in your portfolio. Real estate is an interesting asset class because historically it has offered a higher return than bonds (but less than equities) albeit at a higher risk (again less risk than equities). Also, real estate has low correlation with other asset classes and adding it to your portfolio will reduce overall volatility. An allocation of 5%-10% to REITs seems reasonable but some recommend going as high as 20%.
The iShares CDN REIT Index Fund (TSX: XRE) is composed of REITs that are listed on the TSX. The MER on the fund at 0.55% is on the high side and might be acceptable for smaller investments. However, if you have a large portfolio you may want to invest in the underlying REITs directly because the two largest REITs – RioCan (REI.UN) and H&R (HR.UN) – make up 36% of the fund.
PS: I noticed that Million Dollar Journey has published a primer on REITs, which you may want to check out as well.
moneysense.ca, 11/07/07
Great post CC, and thanks for the mention. Do you hold any XRE or have any exposure to the REIT market?
[...] you’re looking for some more info on XRE, Canadian Capitalist has some more info that you should read up [...]
CC mentioned that he’s not in REITs.
I hold some REITs in my accounts but I bought them a while ago and am sitting on a sizeable gain and I really have no incentive to sell them. I used to hold more REITs, but I was taken out of my position in Alexis Nihon REIT by acquisition and then I sold off my Lakeview Hotels REIT because the fundamentals have changed… Thanks to the morons in our government, they may completely lose their REIT status in 4 yrs, but otherwise I love the management team and their assets. Although I miss having the extra monthly income from those two REITs that I lost, I did make a sizeable gain from those transactions.
I make mention of all this because my individual REIT selections have outperformed the XRE index. Especially in the metric that matters most when considering REITs, the monthly distributions!
In general, real estate and financial services are my two favourite sectors for investment, although I do have some investments outside of those two sectors. So, investment professionals who advocate diversification would probably abhor my portfolio. But as I alluded to in yesterday’s post, my strategy works for me, I’m comfortable with my picks (I can sleep at night) and so I don’t listen to all the noise.
I’m not currently adding to my position in REITs, but I have been watching Scott’s REIT (SRQ.UN-T) very closely these days, waiting to see if it dips any further in our rising interest rate environment.
FT: I personally don’t plan on XRE because the MER is steep and I could get away with one or two individual REIT holdings. I currently don’t have any exposure to REITs because IMO they’ve been overpriced ever since I started watching them. There will be buying opportunities in the future!
CC. In general, I agree with you. The rising interest rate will increase a REIT’s interest expenditures on their leverage (mortgages) and put a squeeze on their earnings (and hence by extension their distributions). All REITs are leveraged to some degree, but some REITs have a lot less leverage than others. The ones with more leverage will be the ones which are harder hit by rising interest rates. Look for the debt ratios and mortgage terms of whichever REITs you’re considering to determine the quality of the REIT and whether it is likely to decline in value when interest rates rise.
I still haven’t moved my rrsp to ETFs yet because I’m still waiting on VEA. Although I don’t really want to time the market I’m definitely thinking of doing a CC and holding off on emerging market & REITs.
CC do you really think that a 0.55% MER is enough to warrant buying the individual REITs? The top two only have 1/3 of the index which isn’t that much. I’ll have to think about this one. If I was buying them now I’d be looking at about $15k for that sector.
Mike
Phis S – Many REITs lock in their mortgage contracts much longer than our typical 5-year fixed. If the term of a contract is relatively long or matches the amortization period, then rising interest rates will have little impact to the interest expenditures, although one must discount the distributions to present value.
CC – When you said REITs historically offered a lower return than equities, is that total return (including reinvested distributions)?
FJ: Yes. That would be total returns. BTW, I believe Uncommon Wisdom has a section on real estate where the risk-return profile of real estate is discussed.
Really? REITs including distributions returned less than equities? What about on an after-tax basis? A good portion of the distributions in many REITs (specifically the junior REITs) are classified as return of capital because of depreciation. And in fact if you never sell the REIT and hold it in a taxable account, then that portion is not taxed at all.
Mike: REITs and Canadian equities are where I plan to use stock holdings directly to capture exposure. I’ll probably end up holding just RioCan. My allocation is 5%, so even if my picks tank that’s ok.
Phil: That would be total returns before taxes and reflects the performance of US REITs.
[...] iShares Canadian REIT Sector Index Fund. (Canadian Capitalist) [...]
[...] response to an earlier post on iShares CDN REIT Sector Index Fund (XRE), some readers were interested in the historical risk and return characteristics of REITs. David [...]
[...] most expensive ETFs in the portfolio are the iShares CDN REIT Sector Index Fund (XRE) at 0.55% and the iShares CDN Real Return Bond Index Fund (XRB) at 0.35%. The lone mutual fund in [...]
[...] — the average ETF MER is now 0.54%, up from 41% just over a year ago. Pretty soon the iShares CDN REIT Index Fund will be one the bargains [...]
[...] to any asset class in the portfolio). Canadian investors can get exposure to REITs through the iShares CDN REIT ETF (TSX: XRE). The XRE is also a prime candidate for unbundling the ETF and directly investing in the underlying [...]
[...] CGR is much more diversified than the iShares CDN REIT ETF (XRE) and has a decent yield, I wonder if it is appropriate to add foreign real estate to a portfolio, [...]
[...] A Tour of ETFs: iShares CDN REIT Sector Index Fund [...]
I have owned XRE now for 1 year and it has grown by 27% CG+Interest, yield about 7%.
Listening to CBC O’Leary, an interest hike can seriously affect REITS.
I wonder if I sh sell and wait for them to settle at a lower price, also to hang in longer might als be greedy.