Real estate investment trusts (REITs) offer investors a way to reap the returns of a large, diverse portfolio of property without the low liquidity or effort that can make managing that many properties on their own unrealistic. REIT exchange-traded funds (ETFs) take that a step further. Composed primarily of REIT securities and derivatives, REIT ETFs give investors a tool to gain exposure to an even larger share of the real estate market and, in some cases, giving investors access to REITs that aren’t otherwise traded publicly.
Defining the REIT ETF
A REIT ETF invests a majority of its assets into REITs and related securities and derivatives. REITs are investment companies that buy and manage real estate in order to generate income. Some might specialize in commercial properties like office buildings, warehouses and storefronts, or rental properties like multi-tenant buildings or even single-family homes. Others might include a diversified portfolio of different property types. The income an individual REIT generates from these properties year-over-year varies depending on the performance of the properties it owns.
As an investor, REIT ETFs help you gain exposure to entire market segments. Rather than risking your investment on specific properties or REIT companies, you can invest in the entire commercial real estate market or the entire vacation property market by finding a REIT ETF that tracks the index you’re interested in.
Most real estate funds invest in equity REITs, a class of REITs that are required to pay out at least 90% of their income as dividends to their shareholders. This requirement makes payouts more consistent and makes REIT ETFs particularly attractive to income investors looking for high-dividend yields.
While almost 90% of REITs are equity REITs, you can also find ETFs that track mortgage REITs or hybrid REITs. A mortgage REIT either originates mortgages to loan directly to borrowers or buys existing mortgages and mortgage-backed securities. This gives investors access to the mortgage market without the capital required to become a loan originator or buy mortgages themselves. A hybrid REIT is a blend of equity and mortgage REITs. It includes a portfolio of both property and mortgages, giving investors exposure to both real estate and the mortgage market.
The Advantages of a REIT ETF
There are many reasons investors choose to add REIT ETFs to their portfolios. For those interested in real estate, a REIT ETF requires less effort to find or manage properties but offers similar returns. For investors primarily interested in equities, REIT ETFs are a relatively low-risk, steady return asset that can provide stability and diversification to an equity portfolio. Here are the main reasons investors look to REIT ETFs:
- High-dividend yield. REIT ETFs are perhaps most well known for their impressive dividend yields because they typically invest in equity REITs, which are legally required to pay at least 90% of their income to shareholders in the form of dividends. However, where an individual REIT’s income can vary from year to year based on market conditions, a REIT ETF can offer less fluctuation in dividend payments because it’s more resilient to market fluctuations.
- Less active management. Investing in property takes intensive research to find the right opportunities and you’ll spend a lot of time managing the property once you own it. With a real estate fund, there’s none of that. You can simply read the fund’s prospectus to see which REITs it invests in and check its price performance the same way you would evaluate any other ETF. Once you’ve added a REIT ETF to your portfolio, you simply track its performance and periodically rebalance the same way you would the other equities in your portfolio.
- Passive index tracking. The investment performance of a single property or REIT is dependent on the market conditions where the property is located. Local market fluctuations in demand, availability and potential can seriously impact the returns of a single investment from year to year. By investing in a fund that tracks an entire index, even if a few of the individual REITs in that index have a bad year, stronger performance from the other REITs in the index will make up for those poor performers.
- Diversification. Diversification is key to managing the risk your portfolio is exposed to. As mentioned above, individual REITs or properties can suffer from unfavorable market conditions. Adding a range of assets in a broad range of market segments means that, even if a few of your assets perform poorly this year, the stronger performance from other assets in your portfolio will balance that out, helping provide more consistent income in all market conditions.
- Low overhead. Whether it’s annual maintenance, costly repairs, insurance premiums, property taxes or other fees and costs associated with ownership, the overhead of buying property directly adds up. For each additional property you add to your portfolio, that’s a whole new set of overhead costs. With a REIT ETF, you’re adding hundreds or thousands of properties to your portfolio without having to worry about any of that overhead. While the REITs themselves do have to pay those costs, which will cut into the income they generate, this investment option still means you aren’t required to cover these costs out of your own pocket. You just get the income generated afterward in the form of a dividend payment sent directly to your brokerage account.
Who Benefits From REIT ETFs?
As a high-yield, passive investment, REIT ETFs work best as part of passive investing strategies, but they’re also a great tool for any investors looking to diversify their portfolios. Investors who benefit the most from adding REIT ETFs to their portfolios include:
- Income investors looking for high-dividend yield investments to add to their income portfolio
- Investors who want to minimize the research required when selecting REITs
- Novice investors looking for an easy, lower-risk asset to start their investing journeys with
- Investors looking to diversify their portfolios without needing to choose individual REITs or other equities
- Investors interested in real estate but who don’t have the time or interest to actively manage properties.
- Risk-averse investors who want a lower-risk way to add real estate to a conservative portfolio
Types of REIT ETFs
Just as there are various types of REITs, there are also REIT ETFs that focus on a specific industry or real estate sector. You can get an understanding of a REIT ETF's investment objective by reviewing the fund's prospectus as well as its current holdings.
Most of the large real estate ETFs have a diverse portfolio across multiple property sectors, but others have a higher concentration of specific types of REITs, including:
Benzinga’s Best REIT ETFs
Whether you’re an experienced investor looking to gain exposure to the real estate market or a novice investor looking for a beginner-friendly investment to start building your portfolio with, here are the best REIT ETFs on the market right now:
The Vanguard Real Estate ETF (VNQ)
| Ticker | Company | ±% | Price | Invest | ||
|---|---|---|---|---|---|---|
The Vanguard Real Estate ETF (VNQ) is one of the largest and most well-known real estate ETFs on the market. It had an average annual return of 12.48% over the past 3 years and a dividend of 3.1%. The ETF has a diverse portfolio, with some of its largest holdings including American Tower Corp (NYSE: AMT), Prologis (NYSE: PLD), Simon Property Group (NYSE: SPG) and Welltower (NYSE: WELL).
iShares real estate ETF (IYR)
| Ticker | Company | ±% | Price | Invest | ||
|---|---|---|---|---|---|---|
The iShares real estate ETF(IYR) is another popular option with an average annual total return of 10.03% over the past 3 years with a dividend yield of 1.99%. The ETF also has a well-diversified portfolio, which is very similar to that of the Vanguard Real Estate ETF.
Fidelity MSCI Real Estate Index ETF (FREL)
| Ticker | Company | ±% | Price | Invest | ||
|---|---|---|---|---|---|---|
The Fidelity MSCI Real Estate Index ETF (FREL) follows the MSCI USA IMI Real Estate 25/25 Index, and has provided an average annual return of 12.49% over the past 3 years. The ETF has a diversified portfolio made up of REITs and other real estate related companies, such as CBRE Group (NYSE: CBRE), Jones Lang LaSalle (NYSE: JLL) and Redfin (NASDAQ: RDFN).
Choose the Right High-Yield REIT ETFs for Your Portfolio Today
Thanks to REIT ETFs, you don’t need to buy property or even research REITs to reap the benefits of today’s hot real estate market. Armed with this information on REIT ETFs and how you can use them in your portfolio, you can make informed real estate investments and gain exposure to larger segments of the market without the effort or risk of buying property. Come back to Benzinga any time for more investment tips and insights.
Frequently Asked Questions
Are REIT ETFs a good investment?
As an alternative to buying actual real estate, REIT ETFs can be a great investment. The typically high-dividend yields make these assets a good addition to an income portfolio. It requires far less capital to get started. Investors don’t have to cover the overhead costs of owning property directly. The ability to track an index means you aren’t exposed to the same risk as investing in a single property or REIT.
What is a REIT ETF?
A REIT ETF is a fund that invests its assets in REIT securities and derivatives. As an investor, that means you can invest in real estate without the risk usually associated with buying single properties or choosing specific REITs. You can buy a REIT ETF just like you would buy any other stock, making it one of the most beginner-friendly ways to start building a real estate portfolio.
Other REIT ETFs
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