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How to select REIT ETFs.


How does an Individual Investor sort through and select from the multitude of Exchange Traded Funds (ETFs)?

ETF Screening Tools and Criteria in Practice.

Previously we used ETF screening tools and selection criteria to select EAFE & EM, U.S., Global and Canadian Equities and Bond ETF(s). Again,  our aim is to build an ETF portfolio that resembles the PIAC average Pension Plan asset allocation. Using PIAC as a reference portfolio, we next select the next largest allocation – Real Estate.

ASSET MIX of PLANS at DEC 31, 2010 PIAC Allocation ETF options include Simplified allocation
       
CASH -1.52%    
CANADIAN BONDS 26.20% XBB, XSB 30%
REAL RETURN BONDS 4.58%    
MORTGAGES 0.69%    
FOREIGN BONDS 1.76% BND  
CANADIAN EQUITIES 15.99% XIU 20%
U.S. EQUITIES 6.14% VV 10%
EAFE EQUITIES 5.84% VEA 10%
EMERGING MARKETS 3.05% VWO 10%
GLOBAL EQUITIES 12.42%    
REAL ESTATE 8.86% XRE ZRE VNQ 10%
V.C. / PRIVATE EQUITY 7.24%    
INFRASTRUCTURE 4.15% CIF  
OTHER ASSETS 2.98% XAL 10%
HEDGE FUNDS 1.56%    

Real Estate (REIT) allocation.

Allocate ~10% (at least) to REITs.

Using the TMX ETF screener, select Equity (Asset Class), Canada (Region), All (Style), All (Size), Financials (Sector) and All (Issuer). (The TMX ETF screening tool builder, PUR, classifies REITs as Financials. Don’t shoot the messenger). De-select Leveraged, Inverse, Advisor Class and ETN. There are two Canadian REIT ETFs. iShares XRE (market cap based) and BMO’s ZRE (equal-weight).

For U.S. Real Estate (REIT) exposure, use the IndexUnvierse ETF screening tool to select Equity (Asset Class), US & Canada (Region), US (Geography), and Equity U.S. Real Estate (IndexUniverse Segment). De-select Inverse, Leveraged, ETN’s.

Of the 16 U.S. REIT ETFs, VNQ from Vanguard provides diversified exposure to 107 REIT stocks covering Specialized, Retail, Residential, Office, Diversified and Industrial REITs for an MER of 0.12%.

We’ve now allocated to Bonds (30%), Canadian, U.S., EAFE & EM Equities (50%), plus REITs (10%). That’s the portfolio’s ‘core’.  What about ‘Alternatives’?

Next time?
ETF selection tools for an Alternatives allocation.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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