ZRE – BMO Equal Weight REITs Index ETF

I did a previous post on XRE, so I thought it would be interesting to see how BMO’s REIT ETF stacked up against it.

This Exchange Traded Fund (ETF) was introduced May 19, 2010, and seeks to replicate the performance of the Dow Jones Canada Select Equal Weight REIT Index.

The biggest difference between the two is that the holdings in XRE are based on market capitalization weight while ZRE’s holding is based on a fixed weight. This is an important difference to remember throughout the post.

Which companies are represented in ZRE?

In ZRE, the main sector represented (obviously ) is real estate.

The following is a list of the top 10 holdings of the fund (as of June 25, 2013):

Altogether, the top 10 holdings account for approximately 60% of ZRE’s portfolio while the top 10 holdings account for almost 85% of XRE’s portfolio. This is a direct result of the funds’ different investing goals, and there are pros and cons for each direction. In total, ZRE owns shares in 19 different REITs and XRE currently holds 15 different REITS, so I’ll give this round to ZRE.

Which ETF to choose?

When making your decision on which ETF to choose, here are a couple things to keep in mind.

Management Expense Ratio (MER)

One of the biggest reasons to build an investment portfolio containing ETFs is that the costs of owning them are much lower. XRE has a current MER of 0.60%, while ZRE’s maximum annual MER is 0.55%. ZRE takes this round as well.

Tracking Error and Return

The purpose of ZRE, like other index funds, is to replicate the returns of a benchmark index. In this case, ZRE is designed to replicate the performance of Dow Jones Canada Select Equal Weight REIT Index. Therefore, the primary goal of the fund manager is to minimize the difference between the fund return and the index return. In order to determine how successful a fund manager is in accomplishing this goal, you have to look at the tracking error. Ideally, you want to purchase ETFs that have the lowest tracking error record.

The following shows ZRE’s returns compared to its benchmark index; you can see that the fund managers have been doing pretty well in keeping the tracking error low. (The following chart is from BMO’s website)

Unfortunately, I couldn’t pull up the exact information for the two (annual information provided for XRE while ZRE shows a more detailed chart as shown above), so I am unable to do a direct comparison, but they both track their indexes pretty well.

Annual Returns

Remember that historical returns DOES NOT guarantee FUTURE PERFORMANCE! Just thought I’d throw that reminder out there again (you will see why shortly!)

The following is a summary of the distributions for the two ETFs during the past few years:

ZRE has a partial 2010 return (inception year), but I did not include it in the analysis. Quite a difference hey? Hopefully, ZRE has figured itself out and will post more comparable returns going forward. When I originally did the XRE analysis last year, I questioned its ability to maintain its spectacular returns so I had to see how it is currently doing; YTD for XRE is currently 0.34% while ZRE’s YTD is 1.10%. Quite different from the past few years, but it will be interesting to see how the rest of the year pans out. This round goes to XRE.

Dividends

The following is a summary of the distributions for the two ETFs:

With the exception of one dividend payment, ZRE’s distributions are slightly higher than XRE, so ZRE takes this round.

This smack-down was pretty one sided, although some (including me) would argue that annual returns is a big factor! I started adding XRE to some of my portfolios, but they are ALL minor positions (target is around 5% of the total), but I will switch over to ZRE going forward. The biggest argument with owning REITs is that the holdings are so few that it may make sense for some to hold the REITs directly rather than through an ETF, and you will save yourself the annual MER every year. Although I did consider this, most of my portfolios are not large enough in size to justify holding individual REITs for the time being, so ZRE will be the choice for now. Which begs the question; how large should your portfolio be before holding individual companies?

What do you think readers? Are either of these ETFs part of your portfolio?

Thanks for dropping by!