Comments on: Unbundling the iShares CDN REIT Index Fund (XRE)

By: The Amateur Investor Manifesto, Part 3

The Amateur Investor Manifesto, Part 3 — Sun, 14 Dec 2008 22:01:25 +0000

[...] high MER of 0.55% but only a few equities. With my estimated starting allocation of around $30,000 it might be best to unbundle and save a bit on fees. This is appealing because I’ve never bought and sold stock myself, this [...]

By: Jordan Clark

Jordan Clark — Wed, 26 Nov 2008 08:34:08 +0000

CC,

How about unbundling the XRE and instead of buying the REITs with a brokerage, using a DRIP instead. Then not only do you avoid the MER, the trading cost but you would also get about a 3% bonus/discount directly from the trusts.

The downside is the hassle of setting it up and you would only be able to easily rebalance by making additional contributions, but it should be a very good buy and hold strategy.

By: Weekly Dividend Investing Roundup - June 28, 2008 » The Dividend Guy Blog

Weekly Dividend Investing Roundup - June 28, 2008 » The Dividend Guy Blog — Sat, 28 Jun 2008 14:00:00 +0000

[...] can participate in a REIT index by buying only 3 high yield [...]

By: Canadian Capitalist

Canadian Capitalist — Fri, 27 Jun 2008 14:38:26 +0000

Michael: I’m not sure if you are talking about tracking the TSX 60 Index or the REIT index. The REIT index has just 12 components, so you need only $20,000 to track it faithfully for the same cost as holding XRE assuming you pay $10 per trade to rebalance once every year. For the TSX 60 index, you are right that you need a large amount invested to save anything on the MER.

By: Michael

Michael — Fri, 27 Jun 2008 14:24:06 +0000

I see a subtle issue with this strategy. Your input would be appreciated. When you rebalance annually, you’ll need to adjust the weights of most of your securities. This means that on an annual basis you will need to pay a commission on each security traded — even if its a small trade. Unless you are willing to withstand the tracking error, these commissions should be more expensive than the MER.

This assumes you don’t invest a large amount (175k) annually.

By: Bullish Dividends

Bullish Dividends — Fri, 27 Jun 2008 02:21:58 +0000

CC,
Thanks for the great post, I’ve been holding XRE to fulfill the ‘REIT’ portion of my portfolio, but for the longest time I’ve been wondering if I’d be better off splitting that money between a select few REITs (RioCan being one of my long time favorites). Its always been a side thought and I hadn’t given much more thought, but I think that this article has sort of sealed the deal for me. I’m going to start doing some analysis on REITS again to see if I can get a good mix to make the switch worthwhile.

Phil, that is an interesting strategy, thanks for sharing it!

-Bullish Dividends

By: Ryan

Ryan — Thu, 26 Jun 2008 00:52:51 +0000

CC,
thanks for the clarification. I had forgotten about the “may pay a dividend in the future” aspect.

Phil,
Indeed, I own 2 REITS for the reasons you list.
ryan

By: Phil S

Phil S — Wed, 25 Jun 2008 22:26:18 +0000

To Ryan,

Personally, I don’t see much of any difference between buying a REIT and buying a rental property from a taxation standpoint. You are buying them both for rental income and in the first few years that you own the rental property (or the first few years of a junior REIT), it always just so happens that the Depreciation & Amortization are large because the capital cost of the property is large.

The advantage of the REIT is that you can just invest a few thousand dollars in it (ie. take a small position) and you don’t have to manage the property yourself. The advantage of rental property is that it is less likely to go to zero (even if it burns down you still have insurance money and the value of an empty lot). But from a tax standpoint, it is very nearly the same thing.

In fact, I have been looking around for some good rental properties – but so far I still haven’t found any properties that have a capitalization rate that makes it worthwhile.

By: Phil S

Phil S — Wed, 25 Jun 2008 22:11:43 +0000

Hi Mihai,

For MY “junior” REIT portfolio, I’m heavily weighted in Whiterock REIT (Symbol WRK.UN-T). I also have a smaller holding in InStorage REIT (Symbol IS.UN-T). And as well, I have a small holding in Huntingdon REIT (Symbol HNT.UN-T). There are a few other junior REITs out there which I do not hold as well as some private REITs as well.

Whiterock is now “in the clear” so to speak, as their payout ratio is below 100% and thus it will mean that they will start to have some small portion of their distribution be taxable. Huntingdon REIT is still overdistributing, so on the one hand, it means that they’re still quite a risky investment, but on the other hand, it means that they are taxed as 100% return of capital. InStorage I haven’t held for very long, so I haven’t compared their tax statements and such, however, the last time I checked, it looks like their line item for Amortization is bigger than their EBITDA, which means that they should also be classified as 100% Return of Capital when tax time rolls around. Again, that generally means that they are overdistributing (100%+ payout ratio), hence it is a risky investment.

I wouldn’t recommend to make it a large part of your portfolio, but if you have some interest in having some “speculative long term hold strategy” in your portfolio, then you should take a look. As with any advice, you should conduct your own due diligence on the companies. SEDAR has all of the public documents.

By: Rob

Rob — Wed, 25 Jun 2008 21:26:00 +0000

I think the key idea is to say how much of the ETF do you want to track. Take the iShares CDN S&P/TSX FINANCIALS Index (XFN) http://ca.ishares.com/product_info/fund_holdings.do?ticker=XFN
which charges an MER 0.55%. It has 30 holdings but if you focus just on the big 5 banks and Manulife and Sun, you are covering approximately 78% of the index with only 7 stocks. Do you really need to buy, say, Kingsway Financial to get their 0.13% exposure? I don’t think so.