# Is it worth adding REITs to portfolio?



## james4beach (Nov 15, 2012)

I don't own property or real estate, and sometimes I wonder if I should own some REITs for real estate exposure. What do people think about this?

The hesitation I have is that REITs correlate strongly with the broad stock market:
Chart of XRE vs XIU since 2007
Chart of XRE vs XIU since 2012

These charts show the strong correlation, and also show that the overall performance is similar. So, REITs don't offer any portfolio diversification and they seem to just duplicate existing Canadian exposure.


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## My Own Advisor (Sep 24, 2012)

Different time periods first of all but I think this is a reversion to the mean to some degree. In some periods, REITs have performed great. In other times, not so much.

I think there remains value in owning 10% or so in REITs in your portfolio, mainly for income.


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## doctrine (Sep 30, 2011)

REITs are underrepresented in the TSX index, which is one reason to own Canadian REITs. They also have less volatility and, at times (but not always), move in opposite directions to the index, reducing overall volatility. 2011-2013 is a good example when REITs outperformed; as well, they are outperforming this year. They may underperform moving forward, but that is why you own both.


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## hboy54 (Sep 16, 2016)

Never owned a REIT. I never actively rejected them, just never caught my interest. Stocks work well for me so never have an inclination to venture elsewhere.


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## Oldroe (Sep 18, 2009)

When Rio was $10 in 2009. A fabulous buy.


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## Mortgage u/w (Feb 6, 2014)

I am contemplating the same thing. I do own rental property so I can say that I am already exposed to RE but I am very tempted to add REI and H&R to my portfolios. I do not like index funds. I like to think that my individual stock choices are better than a group average. 

My concern is all this talk about housing bubble - although I do not believe the hype, my concern is the more people talk about, the more they start believing it.


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## pwm (Jan 19, 2012)

I prefer to use ETFs for my REIT allocation. I'm looking to buy some VRE when the price gets below $29.95.I like VRE over XRE or ZRE. It has a lower MER, (0.38% versus 0.61%), and has performed better for the last 5 years. See attached graph:

View attachment 15466


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## 1980z28 (Mar 4, 2010)

For me i own a lot of car.un is my largest holding,apts seem to do ok in Ontario


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## BennyTroves (Jun 10, 2017)

Well REIT's have been on a good run. Savvy investors always buy things on a deal, and all the indicators point toward REIT's not being a deal right now and may trend downward with rising rates. It's a hard thing to predict with retail spaces closing down. The whole thing with market indexed ETF's is that you don't have to worry too much. As long as the world population continues to increase, so too will the stock market over time.


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## Koogie (Dec 15, 2014)

james4beach said:


> I don't own property or real estate, and sometimes I wonder if I should own some REITs for real estate exposure. What do people think about this?


That is precisely the reason I bought into a REIT ETF some years ago. I did not own a home at the time (wish I still didn't but that is marriage for you). I remember from research at the time that you are correct in that they closely follow the market. However, I am a tinkerer and already had (and still have) a bellyfull of TSX index ETFs, so I "diversified" a little. Plus, the income from a REIT fund is always psychologically welcome in any market.



pwm said:


> I prefer to use ETFs for my REIT allocation. I'm looking to buy some VRE when the price gets below $29.95.I like VRE over XRE or ZRE. It has a lower MER, (0.38% versus 0.61%), and has performed better for the last 5 years. See attached graph:


I own VRE (and a few individual REITs). If I had to do it over again I would have chosen ZRE (equal weighted) over VRE (cap weighted). Different strokes.


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## GreatLaker (Mar 23, 2014)

TSX composite ETFs like XIC and VCN hold a market cap weight of REITs. (While TSX large cap ETFs like XIU and VCE do not.) So choosing to hold REITs and a TSX composite ETF means a portfolio is concentrated in real estate, without much added diversification. 

Authors like William Bernstein and Paul Merriman have documented how REITs have to a small extent outperformed stocks over the long term, plus some diversification benefit and provide higher more consistent monthly income.

I used to hold about 5% in ZRE. But over the past 5 or so years, the MER on broad market Canadian stock ETFs (XIC, VCN, ZCN) has dropped significantly to 0.06%, whereas the MER on ZRE and XRE has remained much higher around 0.6%.

I concluded that there is not a high likelihood that Canadian REIT ETFs would be able to overcome that cost handicap, and I don't see a huge diversification benefit or need the monthly income, so I no longer hold ZRE.

For someone holding REITs directly rather than an ETF, there may be a performance benefit, but I chose simplification over complexity so no longer hold REITs.


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## AltaRed (Jun 8, 2009)

One needs to remember that REITs vary widely in their scope, just as our financial sector varies widely in scope. They don't correlate all that closely, e.g. A residential rental REIT doesn't correlate to an industrial REIT doesn't correlate to an office REIT doesn't correlate to a retail REIT, etc. I'd pick diversified REITs that don't rely primarily on one tenant or one sector for a long term hold.


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## gibor365 (Apr 1, 2011)

AltaRed said:


> One needs to remember that REITs vary widely in their scope, just as our financial sector varies widely in scope. They don't correlate all that closely, e.g. A residential rental REIT doesn't correlate to an industrial REIT doesn't correlate to an office REIT doesn't correlate to a retail REIT, etc. I'd pick diversified REITs that don't rely primarily on one tenant or one sector for a long term hold.


Also, take in consideration that some REITs are only Canadian, others mixed Canada/US, others - only US, and others - only Europe (ex DRG.UN)


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## james4beach (Nov 15, 2012)

I still have trouble with this argument to hold REITs just because they are under-represented in the index. Like I posted in those charts, the correlation with the TSX index is very high... they reverse at the same points, have the same bull & bear phases, etc.

http://stockcharts.com/h-sc/ui?s=XRE.TO&p=D&st=2012-01-01&en=(today)&id=p35372104811

I don't see what you're gaining by holding REITs. If there's some spare money and choice to add more to your portfolio, surely you get better bang for the buck by diversifying into something totally unlike the TSX -- say foreign stocks, or gold?


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## gibor365 (Apr 1, 2011)

> I don't see what you're gaining by holding REITs.


 dividends


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## My Own Advisor (Sep 24, 2012)

I struggle with REIT ETFs, in Canada, why bother? For those that have a few hundred invested/have a modest portfolio why not save the fees?

The top-5 are pretty dominant in most REIT ETFs = REI.UN, HR.UN, CAR.UN, REF.UN, and then take your pick of AP.UN, CSH.UN, and/or SRU.UN.

Curious.


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## pwm (Jan 19, 2012)

You make a very good point MOA. The number of holdings in REIT ETFs is very small. The same could be said of any ETF or Mutual Fund however. Why not just hold the underlying securities and save MER fees entirely? Actually I've been struggling with this issue for years. Every time I think about selling my Canadian funds and building my own "fund" I end up procrastinating.


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## AltaRed (Jun 8, 2009)

My view is to own a few individual REITs across a few sectors and avoid the high MERs, but I am a stock picker (in Canada). The ETFs are for couch potato investors, those who don't want to spend that much time managing investments, and/or those with insufficient funds to hold multiple holdings. Neither way is wrong or exclusively right.


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## Jimmy (May 19, 2017)

You should look at the low volatility index ETFs. They have a nice mix of everything - a great core investment. ZLB has ~12% REITS. The ones that have a low correlation to the market as well. Check out the holdings.
REF.UN SRU.UN REI.UN and HR.UN


https://www.bmo.com/gam/ca/advisor/...sh!holdings#fundUrl=/fundProfile/ZLB#holdings


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## james4beach (Nov 15, 2012)

pwm said:


> You make a very good point MOA. The number of holdings in REIT ETFs is very small. The same could be said of any ETF or Mutual Fund however. Why not just hold the underlying securities and save MER fees entirely?


You can, but only if you're willing to do the same management work that you're paying the fund manager to do. All portfolios require some degree of management.

Whether you replicate XIU or a REIT index ETF, over time there will be securities that get dropped, new securities that get picked up, and some rebalancing work. Do you think you will be able to stick to this routine for the next 20 years by doing it yourself?

For some people, that's no problem, but others will "buy and hold" a bunch of securities and think they are doing the same thing as the index ETF. An index is not as passive a vehicle as it seems... under the hood, there are some important things going on that contribute to long term success.


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## Pluto (Sep 12, 2013)

In 2008 & 9 I accumulated a whack of xre for a average price of 7.50 and a yield of 10%. I held it for some years - until the nominal yield was about 5% where upon it stopped going up. If I calculated right, total return was better than xiu and S&P. 

The problem is if one buys when yield is say 5% there is very little upside. Better to buy stocks with growing dividends and better price appreciation potential.


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