Published by Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.)

They say opposites attract and when it comes to combining investments in Canada’s banks and real estate the attraction is a good thing.

The behavior of bank share prices and the shares of publicly traded real estate companies move differently as the economic cycle matures.  They’re financial opposites with a low correlation.  REITs hold real assets – land and buildings – and their returns are driven by conditions in the real estate market. Banks hold intangible financial assets and their returns are driven by the behavior of the stock market.

When the two are paired in a fund, they counterbalance each other. The Harvest Banks & Buildings Income ETF (TSX: HCBB) takes advantage of these forces offering a monthly income stream along with the opportunity for capital appreciation. It invests in an actively managed portfolio of Canadian banks and Canadian real estate companies through Real Estate Investment Trusts (REITs).  The Fund may also have up to 25% invested in these sectors in the United States.

The ETF had 28.6% of its assets in Canada’s five largest banks as of Aug. 31, 2018, with 60% of its holdings in financials and 33% in real estate.  The monthly distribution equates to an annual yield of approximately 5.5%.

Banks and real estate trusts can both benefit when interest rates rise as they are now after a decade of record lows. Banks benefit from rising rates because their profit margins rise. As the difference between what they pay on deposits and what they lend for loans get greater, the impact on their profitability can be much greater than the rate rise.

Publicly traded equity REITs own commercial real estate, including office buildings, shopping centers, seniors homes, and apartment complexes. They lease them to tenants and after collecting the rent and paying their expenses, pay out the bulk of what’s left to shareholders.

Publicly traded REITs must distribute most of their income to shareholders in the form of dividends, which is why they are popular with investors seeking income. 

Source: Bloomberg, October 23, 2018.  January 1988 – October 2018.  For illustrative purposes only. 

In a rising rate environment REITs with high-quality holdings and prime tenants can benefit. They capture their rental income which grows as landlords pass on inflationary costs. In addition, the value of REITs property also tends to rise with inflation. These increases give REIT holders a built-in inflation hedge.

It makes banks and buildings a good combination. The Harvest Global REIT Leaders Income ETF (TSX: HGR) also has exposure to many types of real estate investment trusts that are primarily outside of the Canadian market. AM

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