I’ve been pondering buying some REITs in order to increase the real estate allocation of my portfolio which is currently at zero. Several options have popped up:
- XRE – iShares REIT ETF which is made up of Canadian REITs.
- Buying just the top REIT (RioCan) in XRE.
- Buying the top three REITs in XRE.
- Buying the top eight REITs in XRE.
- American REITs most notably Vanguard REIT ETF (VNQ).
Today I will look at the first three options – feel free to suggest any others.
XRE – iShares Canadian REIT Sector Fund Index is my first choice for REITs. It replicates the S&P/TSX Capped REIT Index and fits very well with my (mostly) passive investment choice. The only problem with this particular ETF is that it has a high MER of 0.55%. Now 0.55% is not totally outrageous but it seems a bit high considering that you can buy the top three REITs in the index and get 50% of the market capitalization of XRE. Another option is to buy the top eight REITs and get 85% of the capitalization of XRE.
The amount I’m planning to own for REITs is about $20,000 which is about 8% of our portfolio. For the purposes of this comparison I’ll assume a 10 year investment time horizon.
- Paying 0.55% management fee of XRE per year will result in $110 per year in fees.
- Buying just RioCan (REI-UN.TO) will result in a $4.95 purchase fee which works out to $0.50 per year in fees. Problem is that this stock only covers 25% of the REIT index so diversification might not be good enough.
- Buying the top three Reits (RioCan, H&R, Can) will result in about $1.50 in fees per year. This will give me about 50% of the capitalization of the index which isn’t bad.
- Buying the top eight Reits (RioCan, H&R, Can, Boardwalk, Calloway, Chartwell Seniors Housing, Canada Apartment Properties, Primaris Retail) will result in about $4.00 in fees per year. This will give me about 85% of the capitalization of the index which is pretty darn good.
When I look at the numbers it’s pretty obvious that as long as I don’t care about following the REIT index too closely, buying XRE is a bit of a ripoff. I could probably buy every single REIT in the index and still save money on it’s MER. Buying the top REIT, the top three and the top eight are all pretty much the same cost given that they are all chump change. I think that the extra diversification of buying the top eight is worth the extra couple of bucks per year. With 85% of the index covered, that’s good enough for me. I’ve ignored rebalancing costs but since I’m not too concerned about following the index exactly, I don’t think those will be very much.
I still have to consider US REITs but that will be for another day.
For the amount of REITs I want to buy ($20k) and my trading fees ($4.95) I think that buying the top eight REITs in the REIT index will give me adequate diversification (85% of index) and low costs ($4 per year).
If anyone has any thoughts on my analysis then I’d love to hear them.