Real estate investment trusts, or REITs, are a great way to invest in real estate for a variety of reasons. They give shareholders a slice of ownership in a property or portfolio of properties and guarantee a certain percentage of the profit gets paid out in dividends. A REIT ETF is a type of fund made up exclusively of REIT stocks.
If you want to invest in real estate but can’t afford to invest in properties directly or build a diverse portfolio of REITs, a REIT ETF may be the right starting point for you. With REIT ETFs, you can invest in a diverse range of properties with one low-cost investment—ETFs can be bought and sold like shares of stock on the stock market, and just like stocks, the companies that create and manage ETFs have to provide information to the public that helps you decide if it is a good investment. Before you invest anywhere, it's important to understand the underlying assets, who manages the fund, and what you’ll pay in fees as a shareholder. Read on for some important things to consider when choosing a REIT ETF.
Understand the Holdings
An ETF is a fund that owns many investments on behalf of a group of investors. REIT ETFs hold REITs and REIT stocks. Many ETFs buy REITs in the form of a stock that meets the requirements to be considered a REIT.
Research the Manager
Many companies create mutual funds and ETFs. You can buy REITs managed by reputable, well-known investment firms that are household names, and some from more obscure companies where you need to do a little more research before investing.
Look into the Fees
ETFs tend to charge relatively low investment management fees compared to mutual funds, but that is not always the case. Look at the fees charged by any fund, and compare to similar funds to make sure you get a good deal.
Remember That All Investments Carry Some Risk
REITs and REIT ETFs are heavily influenced by the same forces that shape the real estate markets. Those include interest rates, employment rates, and other economic factors. As with all investments, understand the risks, expected rate of return, and how your money is managed before handing it over.
With those criteria (and caveats) in mind, see below for a list of some of the best REIT ETFs to consider for your investment portfolio.
Vanguard is the largest mutual fund company around and continues to absorb funds at a rapid rate. Vanguard Real Estate ETF trades under the ticker VNQ and is commonly considered one of the best real estate ETFs available today.
With an expense ratio of just 0.12% ($1.20 for every $1,000 invested), Vanguard claims that its fee could save you over $2,000 in fees on a 10-year, $10,000 investment compared to its competitors.
This REIT ETF follows the MSCI U.S. Investable Market Real Estate 25/50 Index. It is considered a little riskier than average, but not among the riskiest classes of ETFs.
Like most real estate funds, this fund got hammered in the real estate crash of 2007-2008, but it has offered steady and growing returns since. This is a great way to add real estate to a retirement account or other long-term investment account. Top holdings include Vanguard Real Estate II Index Fund, American Tower Corp, and Prologis Inc.
Managed by Charles Schwab, the Schwab U.S. REIT ETF comes in as a close second to the best overall real estate ETF. Schwab is both a popular brokerage and a fund provider and offers even lower fees than Vanguard’s competing fund.
This ETF follows the Dow Jones Equity All REIT Capped Index and charges just 0.07% in fees (70 cents for every $1,000 invested). This ETF holds over 100 assets. Major holdings include American Tower Corporation, Prologis, and Crown Castle International Corporation. You’ll notice some overlap with the Vanguard fund above, but as they follow different indices, they contain different assets.
If you want to take your real estate investment dollars all over the world, the iShares Global REIT ETF from Blackrock is a solid fund. This ETF has tended to outperform the benchmark FTSE EPRA/NAREIT Global REIT Index several times since inception.
The iShares Global REIT ETF charges a competitive 0.14% management fee ($1.40 for every $1,000 invested). Major holdings include Prologis, Equinix, and Public Storage.
This fund is invested 70% in the United States, 7% in Japan, 6% in Australia, 5% in the United Kingdom, and the rest in Australia, Canada, Singapore, and France, with “other countries” making up 3% of total assets. These are generally developed, strong economies with stable real estate markets.
Fidelity is another major ETF provider with a focus on U.S. real estate and among the lowest management fees around. You’ll pay a modest 0.08% expense ratio on this fund (80 cents for every $1,000 invested), which tracks the MSCI USA IMI Real Estate Index. Top holdings of this fund include American Tower Corp, Prologis, and Crown Castle International.
This ETF from Blackrock includes exposure to U.S. residential and commercial mortgages. It is targeted to include domestic real estate assets including REITs, real estate stocks, and direct real estate investments.
This ETF is benchmarked against the FTSE NAREIT All Mortgage Capped Index. It had a lot of ground to cover as the fund’s inception date was in May 2007.
The fund charges 0.48% in management fees ($4.80 for every $1,000 invested). Top holdings include Annaly Capital Management REIT, AGNC Investment REIT, Starwood Property Trust REIT, and Blackstone Mortgage Trust REIT.
Invesco’s KBW Premium Yield Equity REIT ETF is smaller than many others on this list, but what it lacks in assets it makes up for in yield. This fund is based on the KBW Nasdaq Premium Yield Equity REIT Index, which tracks small-cap and mid-cap equity REITs in the United States.
The fund charges a 0.35% expense ratio ($3.50 for every $1,000 invested). Top holdings include American Finance Trust, Global Net Lease, and Office Properties Income Trust.
Invesco Active U.S. Real Estate ETF purchases assets included in the FTSE NAREIT All Equity REITs Index. The fund is heavily invested in REITs across a wide range of U.S. real estate sectors. Top holdings include Crown Castle International, American Tower, SBA Communications Corporation, Equinix, and Digital Realty Trust.
It charges a 0.35% management fee ($3.50 for every $1,000 invested). Even in the past, when it slightly trailed the index, the fund performed very well, as has the real estate market overall, since 2009.
If you think the real estate market is going down, a short real estate fund would be the way to profit. Short investments, or bets that an asset will go down in value, are generally considered riskier than those betting on the value of something rising.
The ProShares Short Real Estate ETF yields the opposite performance of the Dow Jones U.S. Real Estate Index. If the index goes up 5%, this fund should go down roughly 5%, but if the index falls, this investment will increase in value.
The fund charges a 0.95% expense ratio ($9.50 for every $1,000 invested) and invests in real estate index swaps at major investment banks like Bank of America, Societe Generale, and Morgan Stanley. Keep in mind that while an asset can go down in value to $0, it can rise forever. That means a short investment can yield dramatic losses when an asset rises in value.
Frequently Asked Questions (FAQs)
How are REIT ETFs taxed?
How do you invest in REITs?
You can invest in real estate investment trusts (REITs) the same way as investing in any other stock or ETF. You need to open a brokerage account that gives you access to the market, and then you can place a buy order to purchase shares in the REIT of your choice. If you don't have a brokerage account yet, shop around to ensure that you choose a brokerage that offers the REITs you want to buy.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.