Unbundling the iShares CDN REIT Index Fund (XRE)

June 24, 2008


Norm Rothery (also featured in this video interview with Jon Chevreau) recently wrote that the ultra-low commissions offered by the discount brokers allow investors with large portfolios to buy the stocks that comprise an index directly and avoid the fees involved in holding ETFs. The concept is interesting but small investors who want to faithfully track an index need a very large portfolio to save money on ETF fees. The simple formula to figure out if it is worth unbundling an ETF is:

Amount at which unbundling an ETF becomes worthwhile = (Number of stocks in the index * Trading commission ) / MER of ETF

XIU, for instance, has 60 stocks, charges a MER of 0.17% and an investor paying $5 at Questrade needs a portfolio in Canadian equities of $175,000 to invest in the underlying stocks directly, assuming he adds money once every year to the portfolio and rebalances at that time. As you can infer from the formula, unbundling becomes practical when the number of stocks in the index is small and the MER is large.

There is one holding in the Sleepy Portfolio that perfectly fits the bill: the iShares CDN REIT Index Fund (XRE). The REIT ETF holds just 12 securities but charges a steep MER of 0.55%. An investor paying trading commissions of $10 only needs to accumulate $20,000 in REITs before he starts to save money by unbundling.

It gets even better — if you are willing to put up with a bit of tracking error, you can hold just three REITs and track slightly more than half the index by putting 50% in RioCan REIT (REI.UN), 30% in H&R REIT (HR.UN) and 20% in Canadian REIT (REF.UN). As REITs are typically a small portion of an investor’s portfolio, the tracking error may not be a huge concern.

Personal Disclosure: We use RioCan REIT as a proxy for the Canadian REIT sector in our personal portfolios.

Time to buy REITs?

January 9, 2008


Not too long ago, investors couldn’t get enough of Real Estate Investment Trusts (REITs) bidding up the asset class so much that the asset class didn’t yield much of a premium over 10-year Canada bonds. How things have changed! Today, XRE (iShares CDN REIT Sector Index Fund) yields 6.8% compared to 3.85% for the 10-year Govt. of Canada bond and has fallen close to 10% since New Year’s Day. Significantly, many REITs are currently trading at significant discount to analyst estimates of NAV. For instance, RioCan (TSX: REI.UN), the biggest REIT in Canada, which makes up close to one-quarter of the index trades at a 18% discount to TD Newcrest’s estimate of NAV. It is always possible that REITs could trade even lower but this may be a good time to tip your toes in the sector.

[1 year stock chart of iShares CDN REIT Sector Index Fund (TSX:XRE)]

Fair Value of REITs

November 14, 2007


In an earlier post on REITs, I quoted from David Swenson’s book that the price of publicly traded REITs fluctuates between a premium to a discount to fair value. Obviously, investors would like to invest in or add to their positions in REITs when they trade at a discount to fair value.

To compute the fair value of a REIT, you would need to add up the value of the land and buildings that it owns and subtract its debt obligations, which isn’t an easy exercise. However, if you have access to TD Waterhouse, search for the TDSI Morning Action Notes for the REIT you are interested in. The analyst reports helpfully include a NAVPU (Net Asset Value Per Unit), which you can use as an approximation for fair value. For instance, the report on RioCan REIT estimates the NAV at $23.10, suggesting that RioCan is currently trading at a modest discount. At its current price, RioCan (REI.UN) is yielding 6.25% representing a 2% spread relative to current 10-year bonds. Since I did not have any exposure to REITs, I picked up some units last week but still far from my 5% target allocation.