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Trade Idea: Playing the Long Game in REITs

Alfred Lee

Trade Idea: Playing the Long Game in REITs

  • Canadian Real Estate Investment Trusts (REITs) have underperformed the broader equity market since it bottomed in late March of last year. Since March 23, 2020, the S&P/TSX Composite has had a total return of 77.9%, while the S&P/TSX Capped REIT Index has returned 70.4%.1 While the sector’s returns have been attractive on an absolute level, it has underperformed on a relative level compared to the broader equity market since COVID-related lockdowns have had a very different impact on various types of REITs.
  • Office and retail-oriented REITs have been the more obvious segments of the sector that the coronavirus pandemic has negatively impacted. As most office workers have shifted to work from home (WFH), the majority of office towers have laid empty, with tenants looking to reassess their leases. Retail properties have also experienced much lower foot traffic, as provinces have implemented ongoing lockdown measures.
  • However, as the vaccination rates in Canada are finally starting to pick up, this should provide a bump for REITs. In addition, as we move closer to an economic re-opening, this should remove much of the uncertainty with office, retail, and even residential REITs. Over the short term, these sub-industries of the REIT sector will likely be the drivers as they price in the normalization of the economy. Over the long term, however, the smaller-cap REITs within health care, industrial and diversified sub-sectors will likely be the drivers in the post-COVID world. As a whole, we believe REITs are well positioned as a late re-opening play and attractively valued, given that many constituents are still trading below pre-COVID levels.
  • When comparing the sectors in our BMO Equal Weight REITs Index ETF (Ticker: ZRE) to its market cap equivalent, there’s a greater focus on smaller-cap REITs given the equal weighting methodology of the index. Over the long term, the equal weighting methodology provides exposure to the sector while minimizing concentration risk and therefore reducing company-specific risk. More specifically to the REITs sector, an equal weighting methodology reduces the concentration in top holdings such as RioCan Real Estate Investment Trusts (REI-U) and Allied Properties Real Estate Investment Trusts (AP-U), which are focused on retail and offices, respectively.
  • On a portfolio level, the equal weighting methodology has placed slightly less emphasis on office REITs (-1.11% weight) and retail REITs (-5.08% weight). Throughout the pandemic, these underweight positions have served ZRE well. In addition, the areas of overweight in ZRE, such as health care and industrial REITs have outperformed.
  • Offices and retail properties may outperform over the next several months due to the continued vaccination roll-out, leading to a re-pricing in these two industries as the economy re-opens and normalizes. However, we believe the pandemic will have transformational effects on the REITs sector over the longer term. Post COVID, more employers will be shifting to a hybrid work model (WFH part-time), which may require office tenants to reduce their footprint. Retail shopping has also increasingly shifted online, which places less emphasis on traditional brick and mortar store fronts and more on industrial REITs, such as warehousing.
  • As previously mentioned, an equal weighting methodology benefits investors by reducing the concentration of top holdings and equally allocating across the sector.2 In the instance of REITs, the larger-cap names include office and retail REITs, which may face headwinds over the longer term. An equal weight strategy also places more emphasis on smaller-cap names, which tend to be REITs that are better positioned for the post-COVID environment, such as industrial, health care, and diversified REITs.
  • Another benefit of an equal weighting strategy is that between every portfolio rebalancing period, it allows the “winners to run” and reallocates back to an equal weight, effectively creating a “buy-low, sell-high” strategy.

Smaller Cap REITs May Be Better Positioned in Post-COVID World

Average Market Cap Average Performance* BMO Equal Weight REITs Index ETF (ZRE) - Weights Market Cap ETF (Weights) Weight Difference
Diversified REITs $2,532,683,635.41 78.66% 13.40% 11.59% 1.81%
Health Care Facilities $2,664,640,389.84 75.21% 4.75% 0.00% 4.75%
Health Care REITs $2,533,518,932.64 97.74% 4.43% 3.49% 0.94%
Industrial REITs $2,983,313,258.02 113.47% 18.70% 17.92% 0.78%
Office REITs $3,254,563,975.38 36.12% 8.71% 9.82% -1.11%
Residential REITs $3,332,130,158.03 54.71% 22.17% 24.10% -1.93
Retail REITs $5,265,781,732.44 66.44% 27.68% 32.76% -5.08%
TSX 71.10%

Source: Bloomberg, BMO Global Asset Management (*Price returns used from March 23, 2020 to May 12, 2021).


BMO Equal Weight REIT Index ETF (ZRE) vs. the Market Cap Weighted Index

BMO Equal Weight REIT Index ETF (ZRE) vs. the Market Cap Weighted Index

Source: Bloomberg (Five Year total returns between May 13, 2016 and May 12, 2021, S&P/TSX REIT Total Return Index used for Market Cap Weighted Index).



1 Bloomberg, BMO Global Asset Management (*Price returns used from March 23, 2020 to May 12, 2021).

2 “Equal weight is a type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund, and the smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio,” Investopedia.


Alfred Lee

Trade Idea: Playing the Long Game in REITs

  • Canadian Real Estate Investment Trusts (REITs) have underperformed the broader equity market since it bottomed in late March of last year. Since March 23, 2020, the S&P/TSX Composite has had a total return of 77.9%, while the S&P/TSX Capped REIT Index has returned 70.4%.1 While the sector’s returns have been attractive on an absolute level, it has underperformed on a relative level compared to the broader equity market since COVID-related lockdowns have had a very different impact on various types of REITs.
  • Office and retail-oriented REITs have been the more obvious segments of the sector that the coronavirus pandemic has negatively impacted. As most office workers have shifted to work from home (WFH), the majority of office towers have laid empty, with tenants looking to reassess their leases. Retail properties have also experienced much lower foot traffic, as provinces have implemented ongoing lockdown measures.
  • However, as the vaccination rates in Canada are finally starting to pick up, this should provide a bump for REITs. In addition, as we move closer to an economic re-opening, this should remove much of the uncertainty with office, retail, and even residential REITs. Over the short term, these sub-industries of the REIT sector will likely be the drivers as they price in the normalization of the economy. Over the long term, however, the smaller-cap REITs within health care, industrial and diversified sub-sectors will likely be the drivers in the post-COVID world. As a whole, we believe REITs are well positioned as a late re-opening play and attractively valued, given that many constituents are still trading below pre-COVID levels.
  • When comparing the sectors in our BMO Equal Weight REITs Index ETF (Ticker: ZRE) to its market cap equivalent, there’s a greater focus on smaller-cap REITs given the equal weighting methodology of the index. Over the long term, the equal weighting methodology provides exposure to the sector while minimizing concentration risk and therefore reducing company-specific risk. More specifically to the REITs sector, an equal weighting methodology reduces the concentration in top holdings such as RioCan Real Estate Investment Trusts (REI-U) and Allied Properties Real Estate Investment Trusts (AP-U), which are focused on retail and offices, respectively.
  • On a portfolio level, the equal weighting methodology has placed slightly less emphasis on office REITs (-1.11% weight) and retail REITs (-5.08% weight). Throughout the pandemic, these underweight positions have served ZRE well. In addition, the areas of overweight in ZRE, such as health care and industrial REITs have outperformed.
  • Offices and retail properties may outperform over the next several months due to the continued vaccination roll-out, leading to a re-pricing in these two industries as the economy re-opens and normalizes. However, we believe the pandemic will have transformational effects on the REITs sector over the longer term. Post COVID, more employers will be shifting to a hybrid work model (WFH part-time), which may require office tenants to reduce their footprint. Retail shopping has also increasingly shifted online, which places less emphasis on traditional brick and mortar store fronts and more on industrial REITs, such as warehousing.
  • As previously mentioned, an equal weighting methodology benefits investors by reducing the concentration of top holdings and equally allocating across the sector.2 In the instance of REITs, the larger-cap names include office and retail REITs, which may face headwinds over the longer term. An equal weight strategy also places more emphasis on smaller-cap names, which tend to be REITs that are better positioned for the post-COVID environment, such as industrial, health care, and diversified REITs.
  • Another benefit of an equal weighting strategy is that between every portfolio rebalancing period, it allows the “winners to run” and reallocates back to an equal weight, effectively creating a “buy-low, sell-high” strategy.

Smaller Cap REITs May Be Better Positioned in Post-COVID World

Average Market Cap Average Performance* BMO Equal Weight REITs Index ETF (ZRE) - Weights Market Cap ETF (Weights) Weight Difference
Diversified REITs $2,532,683,635.41 78.66% 13.40% 11.59% 1.81%
Health Care Facilities $2,664,640,389.84 75.21% 4.75% 0.00% 4.75%
Health Care REITs $2,533,518,932.64 97.74% 4.43% 3.49% 0.94%
Industrial REITs $2,983,313,258.02 113.47% 18.70% 17.92% 0.78%
Office REITs $3,254,563,975.38 36.12% 8.71% 9.82% -1.11%
Residential REITs $3,332,130,158.03 54.71% 22.17% 24.10% -1.93
Retail REITs $5,265,781,732.44 66.44% 27.68% 32.76% -5.08%
TSX 71.10%

Source: Bloomberg, BMO Global Asset Management (*Price returns used from March 23, 2020 to May 12, 2021).


BMO Equal Weight REIT Index ETF (ZRE) vs. the Market Cap Weighted Index

BMO Equal Weight REIT Index ETF (ZRE) vs. the Market Cap Weighted Index

Source: Bloomberg (Five Year total returns between May 13, 2016 and May 12, 2021, S&P/TSX REIT Total Return Index used for Market Cap Weighted Index).



1 Bloomberg, BMO Global Asset Management (*Price returns used from March 23, 2020 to May 12, 2021).

2 “Equal weight is a type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund, and the smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio,” Investopedia.


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