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 Vanguard.com 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 1/3^rd 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