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  5. ZRE: hi, ZRE is up 4. [BMO Equal Weight REITs Index ETF]
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Q: hi, ZRE is up 4.12% since 5i income portfolio purchase ( not sure the exact date of purchase for the income portfolio? ). the unit price is up 21 cents from 10 years ago, or about 1%. so basically holders of the ETF have gotten the dividend but nothing else really. I would have expected the unit price to be up much more than that since 2014, as property values have dramatically increased since 2014, as have rents. can you elucidate for us what is going on here ( im not convinced this is all interest rate action ). im wondering how well this ETF is tracking it's underlying holdings/investment thesis/philosophy? further, do you have data in regards the performance of ETF's in tracking their underlying holdings/investment thesis etc.? my guess is that they all "underperform" as they essentially are just another "equity" on the open stock market, sensitive to the irrationality of the markets? thanks for your insight! chris
Asked by chris on June 06, 2024
5i Research Answer:

ZRE is an equal-weight ETF, and so any weakness in one particular industry of REITs will have a relatively large negative impact on the ETF. This was seen particularly in the office REITs space, where the reduction of office usage put significant pressure on REIT ETFs. Looking under the hood of the ETF, several of these names have seen long-term declines in price (NWH.UN, AX.UN, HR.UN, PMZ.UN, and others). Although, the high yields help to offset these declining prices. 

It is important to note however, that while ZRE's price has been flat since 2012, in 2021 it was 40% higher than today, and similar with 2018-2019. 

House and property prices are higher from 10 years ago, but it's important to keep in mind that these are businesses which acquire properties every year, including the years where property values were much higher (2021, etc.). In addition, as interest rates rise, the cap rates for REITs rise, meaning the fair value of the properties on their balance sheets decline, impacting their valuation. Higher interest rates also negatively impact their ability to finance, thus interest expenses, putting pressure on their profit margins and thus valuations. 

ZRE's benchmark is the Solactive Equal Weight Canada REIT index, which since inception it has underperformed by only 0.01%.

Authors of this answer, directors, partners and/or officers of 5i Research and/or affiliated companies have a financial or other interest in ZRE.