Second, the asset allocation is of thses ETFs are quite sophisticated. A multi-factor model is used to help portfolio mangers determine which sectors or assets will out perform it’s peers (ie. other sectors and assets). It’s a more modern approach, and it’s acceptance is quite high in instituional investment industry (pension funds, pooled funds, personal WRAP accounts). I actually like the asset allocation in XGR etf.

Third, Professor Malkiel study is dated and there are many new studies that show that having only 10-15 stocks are enough to elimanate most unsystematic risk.

Fourth, the NEGATIVE things about these funds are that they are thinly traded!!!!!!!! There can be a large disconect between the actual price of the ETF and NAV, which can hurt your bottom line (or if you are a good trader, potentially increase your returns).

However, I must point out that by buying only 50% in RioCan REIT (REI.UN), 30% in H&R REIT (HR.UN) and 20% in Canadian REIT (REF.UN) is taking more unsystematic risk than buying the Canadian REIT index. A concentration of unsystematic risk on REIT portion is acceptable if REIT allocation is small like 5% of the portfolio. If REIT allocation is 15% or 20% of the portfolio, it might be a better idea to take less unsystematic risk by diversification in the index. Ideally, it requires 30 different equities to eliminate unsystematic risk. Research according Professor Malkiel has suggested REIT has positive characteristics that can strongly benefits one’s portfolio.

Overall, I think overweight in Canadian REIT is good idea during this bear market. I think Canadian REITs will get an increase in P/E boost during 2010, because income trust structure for other sectors will be eliminated and a lot of investors will crowd into the REIT sector.

The only advantage that I can think of is lower trading commissions as you trading 1ETF as opposed to several different ETFs each time; of course, the difference is most likely nominal especially if you are trading larger amounts. They *may* be good for people who fit in the very narrow – ETF vs. Mutual fund realm.

Sam: You may want to consider looking into the TD e-series funds. You can probably build a well diversified balanced portfolio at a lower cost (requires some basic arithmetic, or a spreadsheet made by CC on an earlier post: http://www.canadiancapitalist.com/2008/02/04/sleepy-portfolio-rebalancing-spreadsheet )

Michael: I agree that the fund uses some sort of tactical asset allocation, which would explain why a “growth” fund has more than 40% in bonds.

EconStudent: I agree with you that XRE is too expensive and can be “unbundled” easily:

http://www.canadiancapitalist.com/2008/06/24/unbundling-the-ishares-cdn-reit-index-fund-xre

Barclays could lower the fee on other funds such as the XSB. But unfortunately, ETFs are a product in which the first mover has enormous advantage. Though, Vanguard has introduced VWO and VEA to compete with EEM and EFA respectively at less than half the price, Barclays hasn’t bothered to reduce their MERs. And in a small market like Canada, Barclays isn’t going to budge on fees.