Contrary to the popular perception, Real Estate Investment Trusts (REIT) is not the same as Real Estate Investment Trust ETFs (REIT ETFs), although both are closely linked.
Join me as we dive into the world of exchange-traded funds focusing solely on real estate investments. And as always, I have included a list of the best REIT ETFs I strongly recommend adding to your portfolio, whether as a new or an expert investor.
Key Takeaways
- REIT ETFs are an excellent avenue to invest in real estate even without having deep pockets.
- Over $21 billion assets are currently under the management of 20 REIT ETFs traded on the U.S. markets across equity and fixed income asset classes.
- The best REIT ETFs are REET, IYR, VNQ, SCHH, KBWY, MORT, and NURE.
- Check every potential REIT ETF based on their historical performance, dividend yield, the assets they invest in, ESG scores, and the expenses related to the fund.
- It’s best to go for REIT ETFs issued and managed by investment firms with a proven track record.
REITs and REIT ETFs Explained
Think of a Real Estate Investment Trust (REIT) as an investment company controlling the ownership and managing the revenue generation of real estate properties like hotels, malls, self-storage facilities, warehouses, or apartments. REITs pay impressive dividends, but associated risks exist, depending on the type of real estate they deal in.
On the other hand, REIT ETFs invest in the stocks of these companies. These funds hold a range of real estate securities, thereby offering investors a low-cost entry into the world of real estate investments. In essence, REIT ETFs focus solely on real estate investment trusts (REITs) and provide investors with the liquidity associated with traditional stocks.
With REITs, you get to effectively invest in the real estate market without purchasing a physical property. Instead, you are putting your money on a collection of real estate properties trading on exchanges. The best part? The management of this collection is solely the responsibility of the companies in charge. You only have to pay a small management fee.
REIT ETFs go a step higher and better by giving you broader exposure to real estate markets. These ETFs protect you from the attendant risks of local real estate markets by diversifying into commercial and residential markets, both within and outside the United States. And what’s better than a portfolio that protects the investor’s best interest?
Are REIT ETFs Right For Your Portfolio?
This is one question every investor asks before putting their money into REIT ETFs, and it is understandably necessary. A fixed-income portfolio can benefit greatly from REIT ETFs in the form of capital appreciation and a reliable channel for dividend income. Furthermore, they offer considerably strong protection against inflation.
You can expect higher returns from your investment in the best REIT ETFs without exposing yourself to undue risks. It is just one low-cost investment giving you access to various properties. In fact, including these ETFs in your portfolio ensures healthy and rewarding diversification into the world of real estate while saving you the stress of buying and managing properties.
7 Best REIT ETFs I Recommend
Now that you are convinced of adding REIT ETFs to your portfolio, here is a list of the best REIT ETFs for every investor you can choose from.
Issued by BlackRock, the iShares Global REIT ETF tracks a global index of real estate companies in developed and emerging markets. So, it is a perfect fit for investors looking for a single ETF for both international and U.S. REITs.
In terms of geographical coverage, REET has 65% of its fund invested in the United States, 7% in Japan, 6% in Australia, and 5% in the U.K. The rest is spread across South Africa, Hong Kong, Singapore, Canada, France, and other countries.
The fund has 367 holdings, including Avalon Bay Communities, Public Storage, Prologis Inc, Public Storage, and Simon Property Group. REET has over $3 billion total assets under its management, with a 0.14% expense ratio.
If you are looking for an ETF that exposes your portfolio to domestic real estate companies and REIT, I strongly recommend the iShares U.S. Real Estate ETF (IYR). Since its launch in June 2000, IYR has amassed 88 holdings, making it one of the top real estate ETFs out there.
IYR’s holdings comprise the big names in the REIT sector, including American Tower REIT, Prologis Inc., Crown Castle International Corp, and Equinix Inc. The extensive coverage helps manage volatility. IYR is a $6.699 billion REIT ETF with an impressive turnover rate of 14% and a net expense ratio of 0.41%.
3. Vanguard Real Estate ETF (VNQ)
Vanguard Real Estate ETF (VNQ) is another REIT ETF you should consider. It tracks the MSCI US Investable Market Real Estate 25/50 Index and invests in diverse property types for efficient risk management. With VNQ, you can expose your portfolio to hospitality, healthcare, residential and industrial REITs with minimal risk.
With an expense ratio of 0.12%, VNQ is one of the cheapest options out there. It currently has over $83 billion net assets spread across 174 total holdings, including American Tower Corp, Prologis Inc, Digital Realty Trust Inc, and others.
VNQ is issued by Vanguard, one of the world’s largest and most reputed mutual fund companies.
4. Schwab U.S. REIT ETF (SCHH)
Unlike other options on this list, the Schwab U.S. REIT ETF (SCHH) focuses only on REITs owning real estate directly. As a result, it may not be a good choice for you if you want more hybrid and mortgage REITs in your portfolio.
SCHH has a unique structure. For instance, the highest weight any company in the index can take is 10%. Likewise, the combined weight of companies weighing over 4.5% cannot exceed 22.5%. There are about 140 holdings, all with a market value of at least $200 million. The top 10 holdings account for over 40% of the fund’s total value.
The total asset under SCHH’s management is $6.59 billion, with an expense ratio of 0.07% – the lowest of the bunch.
5. Invesco KBW Premium Yield Equity REIT ETF (KBWY)
The Invesco KBW Premium Yield Equity REIT ETF (KBWY) tracks the KBW Premium Yield Equity REIT Index, a mix of small and mid-cap equity REITs. It’s a prominent feature on the list of the best performing REIT ETFs with its impressive 6.5% dividend yield.
It is important to note that the slight tilt of KBWY towards small-cap REITs makes it riskier than other options. These REITs are known for their weak hedge against negative market impacts, as shown by the poor performance of KBWY during the pandemic. That said, the historical underperformance positions this ETF for a massive bounce-back when small-cap REITs recover.
KBWY is issued by Invesco and has over $312 million total net assets, 38 total holdings, and an expense ratio of 0.35%.
6. VanEck Mortgage REIT Income ETF (MORT)
If you want to expose your portfolio to a mortgage REIT, then you should consider the VanEck Mortgage REIT Income ETF (MORT). Like other mortgage REITs, it generates interest-based income by investing in mortgages and mortgage-backed securities.
The higher earning potential of MORT is in line with what is generally obtainable from mortgage REITs. But, considering these securities are financed through debts, it is best to consider the spread between the mortgage yield and the debt expense of the asset.
MORT has about $300 million in assets value and 25 equity holdings. The expense ratio currently stands at 0.41%. Top holdings include AGNC Investment Corp., Starwood Property Trust Inc., Blackstone Mortgage Trust Inc A, and others.
7. Nuveen Short-Term REIT ETF (NURE)
The final entry on my list of the best REIT ETFs is the Nuveen Short-Term REIT ETF (NURE). As the name suggests, the REITs in this ETF’s portfolio are properties with short-term leases. The income comes from capitalizing on an increase in real estate rental rates. So, it is understandable why about half of NURE’s investments go into apartment REITs, with self-storage, hospitality, and manufactured housing taking up the rest.
With just 35 stocks in its portfolio, NURE is one of the smallest options on my list. Yet, it boasts a 29% portfolio turnover over the past three years, all thanks to its short-term drive. In addition, the expense ratio of this ETF is 0.35% expense ratio, with over $98 million assets under management.
Nuveen issues NURE.
How do you invest in REIT ETFs?
Like ETFs in other sectors, you can buy and sell REIT ETFs like shares of stock on the stock market. The companies issuing and managing these ETFs roll out helpful information regularly. And based on these, you can decide if any ETF is a good fit for your portfolio or not.
Like I always tell my investor audience, ensure you understand the underlying assets of any ETF you want to invest in and its performance over time. You should also know the issuing company, the shareholder costs, and the associated investment fees. Finally, prioritize REIT ETFs issued and managed by reputable investment firms with a proven track record.
Final Verdict
As one of the best performing investment sectors in the last two decades, real estate’s returns in the past 20 years are higher than gold, bonds, value stocks, and even growth stocks. The sector is also one of the best-performing groups in the S&P 500 for 2021.
However, not all of us are wealthy enough to splash several thousand dollars on homes, commercial buildings, or estates. Thankfully, there are other rewarding ways to invest in real estate without intensive capital. One of these ways is through Real Estate Investment Trusts (REIT) ETFs.
REIT EFTs invest in REITs and REIT stocks. So, they offer investors the opportunity to invest in real estate assets, even with not-so-deep pockets. You can build a diverse REIT portfolio with the right REIT ETFs. Assess every potential REIT ETF option based on their historical performance, dividend yield, the assets they invest in, ESG scores, and the expenses related to the fund.
You can also check out other promising ETFs from other sectors here.
Good luck!