You’ll notice that in the ETF Model Portfolio page on Cut The Crap Investing I first offer up the core portfolios with the traditional building blocks of Canadian, US and International stocks supported by a broad basket of Canadian bonds.
That’s a core approach embraced by many self-directed investors. You’ll even see that simple asset allocation embraced by Dan Bortolotti of Canadian Couch Potato. In fact, Dan will argue that any additions or ‘complications’ are not necessary.
Many will suggest that we do not need to spice things up much beyond that core ‘meat and potatoes’ asset allocation. A Canadian investor can certainly put together a sensible portfolio with those assets and that investor would have been rewarded with some very solid returns.
There are assets that can deliver the potential of greater returns and greater diversification. REITs and foreign bonds and emerging market equity funds would fall into that camp. You’ll see those holdings in the portfolios of many of the Canadian Robo Advisors. In the game-changing asset allocation portfolios from Vanguard you’ll find US bonds and emerging market stocks.
One Canadian Robo Advisor that employs REITs and foreign bonds is ModernAdvisor. I am a big fan of that firm and I am a fan of their asset allocation moves. Please have a read of ModernAdvisor. A Better Way For Canadians To Invest. The Canadian Robo’s can also be a great source of education by way of their blogs. Here’s a wonderful REIT primer from ModernAdvisor – Diversify With A REIT ETF.
In that post we’ll find the chart that strongly suggest why we should include REITs for greater portfolio diversification.
From that blog post …
In addition to the income aspect of REITs, real estate also provides strong diversification benefits for a portfolio already holds stocks and bonds. Since 2002, the 5 year correlation between the S&P/TSX Capped REIT Index with the S&P/TSX Composite Index has ranged between 0.23 and 0.76, averaging 0.55. The correlation with Canadian bonds is even more attractive, ranging between -0.02 and 0.34, and averaging 0.12.
Correlation of 1.0 indicates perfect positive correlation, that is, the two investments move in the same direction. Correlation of -1.0 indicates perfect negative correlation, that is, the two investments move in the opposite direction. Correlation of 0.0 indicates that there is no relationship between the two investments.
From the chart we can see that we do gain additional diversification.
Canadian REIT exposure is quite easy. The core Canadian REIT approach is covered by Vanguard with VRE, iShares with XRE and BMO offers ZRE.
- For more on 2019 ETF performance including those REITs you can have a read of this recent post on Cut The Crap Investing.
US and International REIT exposure.
Things get a little more tricky when we leave Canada due to withholding taxes and the potential of currency conversion charges. The go-to Canadian dollar International REIT is iShares CGR. That is a US and Global REIT.
Given that CGR is a Canadian dollar REIT ETF with US and International assets you will face those withholding taxes on income. On that, the folks at ModernAdvisor suggest that you hold that ETF in a taxable account whenever possible as you can claim the tax credit. That said, if you are only investing in registered accounts such as RRSP and TFSA you might not let the tax considerations drive the bus. The additional diversification and potential of greater returns might rule the day for your portfolio.
Hold US REITs in a US Dollar Account.
This is a good practice or portfolio approach for your entire equity assets. It’s a simple call or press of a button or two to open those US dollar accounts with your discount brokerage. The options are then more than ample. You can simply visit the US sites of ETF providers. There are many more options and styles than what you would find available in Canada.
In a recent article for Seeking Alpha I looked at the more complete US and International Equity and REIT growth portfolio. You’ll find some options such as Vanguard’s VNQ for US REITs and REET for US and International coverage.
What is a reasonable level of REIT exposure?
Many portfolio modelers will suggest an additional 5-10%. Of course there is usually some modest REIT exposure in the broad market indices, in the range of 3% ‘or so’. You might choose to add 5% Canadian and 5% US and International. You may decide to take that up to 10% of each.
If Canadian investors could go back they might add or top up that REIT exposure. Courtesy of portfoliovisualizer.com here’s XRE vs the TSX 60 XIU from January of 2009 to end of June 2019.
I had used REITs in my accumulation stage, but will admit to bailing on them for a more pure dividend growth strategy for my semi-retirement years. I may be writing/talking myself into some modest REIT exposure.
What about you, got REITs? How about foreign bonds? Developing markets?
Thanks for reading. Kindly hit those share buttons. You can reach me at cutthecrapinvesting@gmail.com
Dale
Marko Koskenoja
Another good post Dale – very relevant for me because your earlier posts got me thinking that maybe I should have 5% of my retirement investments in a ETF REIT – likely BMO ZRE.
However, in order to do so I would have to sell some other investments and I like all my ETF’s with the exception of my Vanguard VAB Bond ETF that constitutes 20% of my investments. Likely, I would sell some of my BMO ZPR Pref ETF…and I like it too!
I am also considering buying Brookfield Property Partners LP (TSE: BPY.UN) and maybe a little of American Hotel Income Properties REIT LP (TSE: HOT.UN). What do you think of those two?
Too many choices and likely too much tinkering on my part.
Dale Roberts
Hi Marko thanks for stopping by, glad you enjoyed the post. If you are adding monies on a regular schedule perhaps you could simply build a position in a REIT if you’d like to add that asset to the portfolio mix. I’d suggest the PREF as a target before the Bonds if you need those bonds for risk management. Also the REIT will be more income focused. There’s obviously much greater total return potential with that REIT vs Pref.
And if you are looking for more simplicity you might make a call on the route of individual REITs vs a REIT ETF, and go that ETF route of course.
As I have penned on Seeking Alpha, it can be more difficult to remain passive with individual holdings as we are continually bombarded with news and speculation.
Marko Koskenoja
Thanks for the advice Dale.
I’m retired so I am no longer adding new money to my investments. Rather, I am trying to maximize my dividends and overall return while reducing my taxes and risk – wouldn’t it be nice to have all that 🙂
Dale Roberts
Thanks Marko. If you want to add or increase REITs I guess you’ll have to make a move 🙂 I’d prefer REITs over PREFs but that’s just me. What is your equity approach? Core or Div’s or a combination of?
Dale
Marko Koskenoja
Yes Dale – I will sell some of my BMO ZPR Pref ETF and buy some BMO ZRE REIT ETF and/or the Brookfield BPY REIT.
My overall strategy is high dividend Canadian, US and Global ETF’s including BMO Covered Call ETF’S and iShares XDIV and XDG. So far it’s working great as I am generating $43K in tax efficient yearly dividend income.
Now I just need to move around some things to get some REIT investment. After reading your piece about REITs not having a correlation to stocks or bonds I was convinced I needed some!
Cheryl
Yikes! I would say my REIT allocation is way above your 5-10% estimate of my portfolio! But then I like REITs. I like ETFs too, that’s the bulk of my portfolio.
But apparently I don’t like REIT ETFs. Got none of those!
Dale Roberts
Hi Cheryl no worries there. Many like real estate. You’ll see some investors with massive ‘over’ allocations to REITs. That’s a personal decision of course. After all it is investing in hard assets with generous income.
And yes it’s easy to skim the RETI indices and buy enough of ’em. It’s not a large universe. You’ll see that Mark at myownadvisor has done the same 🙂
Shawn
I have more than 10% of my portfolio in REITs but I don’t own a house so it seemed warranted to me. I own Zre but also a half dozen other individual REITs that are spread to different sub sectors. As a private sector employee DB pensions are rare so having only a small DC plan the onus is on me to have enough. I’m in my 30’s and free content like this site are extremely helpful so thanks for all that you do Dale.
Dale Roberts
Thanks Shawn, I’ll admit to also factoring in our Toronto home, our accidental investment, ha. But perhaps that is not prudent, we should look at our investments separately? Not sure of the answer.
Dale