Real estate bears attractive investment attributes that bonds and stocks can’t match. But you could easily get locked out of the investment opportunity if you don’t have the muscle to invest in properties directly.
That’s where real estate investment trust (REIT) exchange-traded funds (ETFs) come in — to give you a slice of ownership in a property or portfolio of properties and guarantee dividends on a percentage of the profits.
Understanding these securities may be a crucial move toward financial freedom. Here’s how to invest in REIT ETFs with the best online brokers.
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REIT ETFs Biggest Gainers and Losers
REITs, usually publicly-traded companies that own or finance real estate, are valued for the income they generate. That is because REITs should pass at least 90% of their taxable income annually as dividends to shareholders.
REITs can be poor investments when the interest rates increase. That said, short-term underperformance isn’t sufficient reason to quit your investment. Despite the meagre returns in 2018, REITs outperformed various asset classes, including U.S. stocks.
Benzinga Pro and other financial news sites provide daily insight into the biggest gainers and losers among ETFs. Use these lists to find a promising REIT ETF or track its trading activity.
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Premarket REIT ETFs
Premarket trading sessions let you react to new information about your ETF before the market opens at 9:30 a.m. EST. Beware that this poses certain risks, including lower liquidity and limited access to other markets and market information. Fluctuations in price is also a problem, so you may not sell or buy your ETF at your desired price. However, you may observe premarket trading to assess the intensity and direction of the market before regular trading hours.
Aftermarket REIT ETFs
Trading after the market closes lets you react and move quickly on significant news events. But you could still be vulnerable if you act on unreliable information. Also, the volumes traded are lower, which leaves you exposed to the risk of price uncertainty and volatility. You can also monitor aftermarket trading sessions to put a figure on investor attitude toward an ETF.
Why Invest in REIT ETFs?
Here are 3 solid reasons to invest in REIT ETFs:
- Diversification at a lower cost: Instead of investing your money separately into different REITs, you can simply buy an ETF that does this for you. You will save on transaction costs and benefit from diversification.
- Accessible to smaller-scale investors: Investing directly in property may require huge upfront investment with further financing needed to support it. REIT ETFs let investors of all sizes board the real estate investing bandwagon.
- Tax advantages: If you remember, REITs provide huge tax benefits to investors since 90% of income generated is paid as dividends. You’ll still experience these benefits if you hold REITs through an ETF.
3 REIT ETFs by AUM
REIT ETFs — securitized portfolios of real estate property — let you invest in an otherwise high-cost area. They combine the income potential of real estate with the liquidity of traditional stocks. A REIT ETF secures more investment in properties by increasing its assets under management (AUM) — an accurate standard to compare ETFs — to attract new investors. Using this indicator, here are the best REIT ETFs to invest in.
1. Vanguard Real Estate ETF (VNQ)
Vanguard Group is among the largest equity and fixed-income managers around. The Vanguard Real Estate ETF provides a high level of income as well as continuous capital appreciation by investing in stocks issued by commercial REITs. It follows the MSCI U.S. Real Estate 25/50 Index and currently has 184 holdings, 10 of which make up 42.80% of the total net assets. Its top holdings include Vanguard Real Estate II Index Fund, Prologis Inc. (NYSE: PLD) and American Tower Corp (NYSE: AMT). This ETF owns $66.6 billion in total net assets and an expense ratio (ER) of 0.12%.
Similar to most real estate funds, VNQ got hammered during the 2007-2008 recession but has offered steady and increasing returns since. The fund boasts equity sector diversification through retail REITs, office REITs, real estate services, real estate operating companies and residential REITs among others.
2. Schwab U.S. REIT ETF (SCHH)
Schwab is both a fund provider and popular brokerage. The fund tracks as closely as possible — before fees and expenses — the total returns of the Dow Jones U.S. Select REIT Index. The ETF has an ER of 0.07% and has 98 holdings worth $5.1 billion — all based in the U.S. This helps you avoid the risk of foreign real estate and is great if you want exclusive U.S. real estate coverage. The asset allocation for this ETF is as follows: Stocks of 99.41%, cash investments of 0.13% and other assets of 0.45%.
SCHH top holdings include Prologis Inc. (NYSE: PLD), Public Storage (NYSE: PSA) and Digital Realty Trust Inc (NYSE: DLR). You will notice some overlap with the Vanguard ETF, but they contain different assets since they follow different indices. The fund has a 5-year annualized return of -1.50%.
3. iShares Global REIT ETF (REET)
Take your real estate investment dollars across the globe with the iShares Global REIT ETF, which tracks the investment proceeds of an index comprising worldwide real estate equities in emerging and developed markets. REET has 308 holdings that add up to a decent AUM of $1.9 billion. Its ER is 0.14%.
The fund is invested 67.29% in the U.S., 8.5% in Japan, 5.26% in the United Kingdom, 3.43% in Australia and 3.04% in Canada. Other exposure markets include Singapore, France, Belgium and Hong Kong make up 8.84% of the market value. Cash & derivatives and “Others” account for 3.63%. Most of these countries are strong, more developed economies with stable real estate markets.
Prologis Inc. (NYSE: PLD), Equity Residential (NYSE: EQR) and Welltower Inc. (NYSE: WELL) are among the top 10 fund’s holdings. REET has enough liquidity to trade shares approximately 921,722 times per day.
Best Online Brokers for REIT ETFs
The AUM comparison standard is just the tip of the iceberg for REIT ETF investing. You also need a stellar platform, versatile trading and tracking tools and an abundance of educational material, all available through an online broker.
Here are the best online brokers for REIT ETFs.
1. You Invest by J.P. Morgan
You can take advantage of Chase You Invest unlimited commission-free ETF trades. Account opening is fast, seamless and fully digital. The brokerage offers 2 distinct account types: You Invest Trade account and You Invest Portfolio account. You can open a You Invest Trade account with as little as $1.
The You Invest portfolio account requires a $500 minimum deposit, charges a management fee of 0.35% of your account balance per year and requires you to maintain at least $250 in your account at all times. The broker also allows you to transfer your ETFs from an investment account, including external firms.
The brokerage provides a web-based trading platform that is user-friendly and offers great search functions for quick asset ticker search. The mobile trading platform is available on Android and IOS. The broker supports your research needs with fundamental company data, a high-quality screener tool, newsfeed through Comtex and 20 technical indicators. Its education section also offers articles and high-quality videos that cover basic concepts, investment strategies and jargon.
As a member of SIPC and FINRA, Firstrade offers a full line of investment products, including 2,200 ETFs that are traded at $0 commission. Opening a trading account is as easy as filling out a few online forms and sending them via email. There’s no minimum stock trading deposit and account maintenance fee. You’ll have the convenience to access account information, option chains, order status and the most recent market news through your mobile device.
Research offerings are also comprehensive, with tools, stock analysis reports and market insights being provided by trusted investment news providers like Benzinga, Zacks, Briefing.com and Morningstar. Margin traders may also take advantage of the broker’s extended-hours trading. Customer support is also available through phone, chat and email.
3. TD Ameritrade
TD Ameritrade ranks among the best online brokers for its commission-free ETF trades, extended-hours trading, $0 minimum deposit and 300 no-fee ETFs. Its web platform gives you access to independent 3rd-party research, planning tools and educational resources. You can also search, access and chart over 400,000 economic indicators as well as perform dry run trades with $100,000 of paperMoney, a platform that creates a virtual trading environment.
Its pro-level trading platform, thinkorswim, features customizable scanners, workspace, trading simulations and profiles. It also features ThinkBack, a tool you can use to backtest trading strategies based on historical ETF trading data. TD Ameritrade is also a leader in mobile trading thanks to its powerful, optimized mobile app that lets you trade on the go.
Add Real Estate Exposure to Your Portfolio
REITs provide the income and growth potential offered by real estate while eliminating the hassle of investing in and owning individual chunks of property. Similar to stocks, it may be difficult to consistently make fruitful choices when investing with individual REITs.
You might be best served by a mutual fund or ETF that tracks a wide REIT index, like the MSCI U.S. REIT Index. REIT ETFs help capture a degree of long-term growth potential, income and diversification that would be difficult to replicate with other asset classes — without taking on undue risk.