ETF Strategy

BMO Equal Weight REITs Index ETF

ZRE is designed to hold an equally weighted portfolio of Canadian Real Estate Investment Trusts.  It’s aims to mirror the Solactive Equal Weight Canada REIT Index. The equal weight nature of the ETF aims to reduce risk compared to similar market-cap weighted ETFs. The top five REIT sector allocations are: Retail 37.9%, Multi-Family Residential 27.4%, Diversified 10.2%, Industrial 9%, and Health Care 5.4%. ZRE’s portfolio spans 21 Canadian REITs.

iShares S&P/TSX Capped REIT Index ETF (XRE)

XRE is designed to provide exposure to diversified basket of Canadian REITs. It is benchmarked to the S&P/TSX Capped REIT Index. It is a capped ETF, so holdings are market cap weighted up to a certain upper limit. As a result, top five holdings include: CAR.UN 16%, REI.UN 11%, GRT.UN 9%, CHP.UN 7.6%, and FCR.UN 7%. By sector allocation, the top five includes: Retail 40%, Multi-Family Residential 30%, Industrial 16.6%, Diversified 5.5%, and Office 4.8%. XRE’s portfolio spans 16 Canadian REITs.

Financial Performance

Looking at the performance of the two funds, we can see ZRE has nicely outperformed XRE, up 15.38% over the last five years compared to XRE at just 4.82%. ZRE’s equally weighted nature is likely a major contributing factor here. As REITs have been very beaten up over the recent high-rate cycle, the equally weighted portfolio of ZRE likely benefitted by not being overexposed to weakness in the larger players. On the other hand, XRE’s concentration in the top names with more leverage likely hurt its performance. On the yield side, both funds have similar offerings with ZRE paying 4.7% vs. XRE at 4.51%. ZRE has historically paid a higher yield which is another attractive point.

Financial Metrics and Forward Estimates

The table above compares a few key stats between XRE and ZRE. XRE evidently has the much larger asset base, just around double that of ZRE. Both funds are quite competitive outside of AUM where fee, yield, and annualized returns since inception are essentially equal while favouring ZRE. The difference therefore comes back to strategy and shows that investors may be favouring cap-weighted funds to equally weighted ones in the REIT space going forward.

Investment Outlook

REITs have been a struggling sector in the market over the last few years as high rates have pressured margins and growth capabilities. As we enter a rate cutting environment in Canada, the future outlook for REITs is much more positive than in years past. XRE and ZRE are two viable options for interested investors. ZRE has the performance edge in recent years, while both funds are highly similar outside of that. The decision for investors should come down to if one wants equally weighted exposure or market-cap weighted exposure. Given how weak recent performance has been, we think that XRE may benefit in future years. As rates come down, larger players who have more leverage and will benefit, while raising capital to fund growth initiatives will also be cheaper. This will likely have a greater benefit on the cap weighted portfolio of XRE. We think either option is solid for Canadian investors looking for exposure to REITs, but we would give slight edge to XRE today.

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Employees, directors, officers, related companies, and/or partners of 5i Research have a financial or other interest in ZRE at the time of publishing. The i2i Fund does not have a financial or other interest in XRE or ZRE.