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ETF Selection (4 of 4).

To select the best ETF to fit the Individual Investor’s job description, investors can refer to the PIAC average asset allocation in combination with the TMX ETF screening tool.

Recall, PIAC is the Pension investment Association of Canada. It is the representative body for 130 Canadian Pension Plans who caretake over $1 Trillion in pension assets for millions of Canadian beneficiaries. For the investor that don’t have a starting point, is there a better one than the PIAC 2010 Asset Allocation average?

The TMX ETF screening tool is cumbersome but … available. (The TMX ETF screening tool only covers the 260 ETFs that trade on the TMX. RBC now has an ETF screening tool too … for clients only. Don’t forget to include and other providers in your ETF search and considerations).

If we use PIAC Real Estate and Infrastructure allocations as our example, the average pension plan allocation is about 13%.

What is/are the best ETFs for an allocation to Real Estate and / or Infrastructure?

Using the TMX ETF screening tool, investors will note that it only works if you know that Real Estate is considered by the TMX to be a financial sector investment. (There are some things I cannot explain.  Real Estate is not an asset class according to the TMX. I can only guess that, because Real Estate ETFs trade on the exchange, the TMX says its equity … regardless of the underlying asset? Further, the TMX ETF screener will not be the best navigation experience … but then again, it was never about the customer experience. It’s all about moving product). Anyway …

On the ETF screener, select:

Asset class: Equity
Region: Canada
Style: Core
Size: All
Sector: Financials
Select: ‘No Thanks’ to the Leveraged, Inverse, Advisor Class or ETNs.

After a few ‘trial and error’ attempts, once should see the remaining REIT ETF choices. XRE and ZRE.

How does the investor choose between XRE and ZRE?

Referring to the criteria (part 3 of 4):

-Regarding exposure and diversification, XRE and ZRE provide different amounts of exposure to the REIT sector because XRE is market cap based (largest holding in XRE is 25% of the entire ETF) while ZRE is equal weights (each security is about 6% of the entire ETF). XRE has 13 holdings. ZRE has 17.
-XRE concentration in RIOCAN (25%) and H&R (12%) REIT holdings are hardly diversified. Future purchases of the equal-weight ZRE would provide some offset to XRE’s concentrated positions.
-The cost of XRE and ZRE are much the same. MERs ~ 0.55%. Current Yields are roughly equal.
-ZRE volume is 1/3rd of XRE volume. If the intention is to buy and hold for income (and reinvestment of distributions) however, liquidity would only matter were the intention to change to sell (or rebalance).
-Both XRE and ZRE trade on the TMX exchange.
ZRE appears to hug its benchmark tighter than XRE.

Conclusions: One would be inclined to offset existing holdings of XRE with future purchases of ZRE.

Other considerations:
Vanguard U.S. Real Estate ETF VNQ is broad, cheap and covers the U.S. real estate market.
Claymore has a Global Real Estate ETF CGR (Using the TMX selection tool, select Equity, Global, Core and Financials).
iShares has 12 Real Estate ETFs to choose from plus an Emerging market and also a Global real estate ETF.
Claymore has a Global Infrastructure ETF CIF  (Using the TMX selection tool, select Equity, Global and Utilities).
iShares Global Infrastructure ETF IGF 
Next time?
Risk management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
9 Comments Post a comment
  1. Interesting question. I’ve seen two papers on just that subject matter: ‘do Pension Plans invest in ETFs’. One paper says Yes. One says No.
    From what I can tell, Pensions (or their Investment Managers) have used ETFs to equitize cash over a weekend, say. And that means XIU (TSX 60) … which helps explain the massive trading volume of XIU relative to any other ETF. But, from what I can see, Pensions are not using ETFs to gain exposure to an asset class, for example.
    I may have to blog on this … stay tuned.


    October 16, 2011
  2. Wondering what your opinion is re BMO’s Covered Call Strategy ETF symbol ZWB? Does it only work in sideways or bear market conditions for maximum yield?? Tx.


    October 13, 2011
    • Gee, tough question.
      ‘Only’ is rather limited but that is what the ‘covered call option strategy’ document seems to imply.
      I would have to say it remains to be seen.
      This ETF hasn’t been around that long.
      I perfer to offer no opinion.
      I will say that I have polled a few Institutional Pension Plan peers … and not a single Plan that I spoke to utilitzes a covered call strategy … so if you believe in the thesis of this blog … ‘replicate a pension plan’ … then the covered call strategy be well ouside core portfolio holdings.


      October 14, 2011
      • BMO just commenced ZWB start of 2011 & already it has $600 M in it!!! Looks like the retail investor is sopping it up!!! Tx. for your comment Doug. Regards.

        PS. My Accountant (Chuck Burkett) says he knows you from school, I do believe.


        October 14, 2011
      • Gee, I’ve known Chuck (and his lovely bride, Shelley) since the late 1970’s. He’s been very successful … but I have more hair! 🙂


        October 15, 2011
      • Yes, Chuck has been super helpful to & for us on tax planning, strategies & filings! We spend probably 25% of our time on corporate & personal tax mitigations & efficiencies!!! Question: are the Pension Plans investing in select ETF’s in a big way? Tx.


        October 16, 2011
  3. Yup. I have XRE too. ZRE makes a lot of sense for my future purchases.

    The XRE versus ZRE problem is common for Canadian investors because the Canadian market is so dominated by a few players.

    See for my rant about concentration in the Canadian market.

    (So the last thingk investors need is a 25% allocation to one REIT).

    There really does need to be a better ETF selection tool.


    July 12, 2011
  4. JTN #

    Ah, I have XRE right now but was already exploring purchasing ZRE in the future. Thanks.

    Too bad ETF investors don’t have a better selection in terms of other infrastructure type funds.


    July 11, 2011

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