Investing in real estate.
Investing in real estate directly can be lucrative, but it also comes with pitfalls. It often involves large initial investments, it can be a time suck and additional costs can pile up along the way. Real estate investment trusts are a far simpler alternative. These publicly traded companies invest in residential, commercial and other types of real estate. And because of certain tax advantages, they’re required to pay out the vast majority of their income as dividends. It’s a popular equity class that has spawned a horde of focused exchange-traded funds. Here are U.S. News & World Report’s 10 best-ranked REIT ETFs, as ranked today.
#10: VanEck Vectors Mortgage REIT Income ETF (ticker: MORT)
Mortgage REITs don’t own real estate, but instead raise capital or borrow money to finance real estate by investing in either mortgages, or mortgage-backed securities. They make their money by the spread between the rate they borrow at and the interest they earn on the mortgages, and use various interest rate hedges to mitigate risk. So interest-rate sensitivity is high. MORT invests in 26 mREITs, including large weights in Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC). Also, MORT yields 8.2 percent, reflecting the high yields of the mREIT space.
Expenses: 0.41 percent (includes 16-basis-point fee waiver)
#9: iShares US Real Estate (IYR)
The IYR holds the more traditional equity class of REITs — trusts that actually own and operate properties. This is also a broad ETF that provides exposure any kind of real estate you could want. IYR’s 126 holdings dabble in everything from apartment complexes to office buildings to nursing homes to industrial property to even hotels and resorts … and a few mREITs are thrown in there, too. IYR isn’t overly invested in its top holdings, with mall operator Simon Property Group (SPG) and communications real estate specialist American Tower Corp. (AMT) combining for just 11 percent of the fund’s assets.
Expenses: 0.44 percent
#8: PowerShares KBS Premium Yield Equity REIT Portfolio (KBWY)
The KBWY is an unabashed yield chase, even going so far as to use a dividend yield-weighed methodology to determine its holdings. Moreover, this fund focuses on small- and mid-cap REITs only, so this isn’t for timid REIT investors. For instance, as of this writing, Geo Group (GEO) and CoreCivic (CXW) — a pair of for-profit prison stocks that yield more than 7 percent, but have endured enormous swings over the future of their business with the federal government — are the top two holdings at 11 and 10 percent, respectively. For an equity REIT, though, KBWY has an excellent yield of 6.8 percent.
Expenses: 0.35 percent
#7: iShares Cohen & Steers REIT ETF (ICF)
The ICF, like IYR, can expose investors to a wide range of geographies and real estate types. However, the portfolio is far more limited, at just 30 holdings, because of the fund’s focus on the most “dominant” stocks in any particular space. This is a “who’s who” of equity REITs, including big allocations to top holdings SPG, storage REIT Public Storage (PSA) and Prologis (PLD), which specializes in leasing distribution facilities. While the ICF (3.9 percent) yields a bit less than IYR (4.4 percent), the former boasts a superior total return to ICF over most significant time periods, and it’s cheaper to boot.
Expenses: 0.35 percent
#6: iShares Global REIT ETF (REET)
An important note about any fund with “global” in the name — that’s not the same as saying “ex-U.S.” So if you think that with REET, you’re getting all international REITs with no American exposure, it’s quite the opposite. In fact, almost two-thirds of REET’s portfolio are U.S. REITs, including the same three top holdings as ICF — Simon, Public Storage and Prologis. And the only top 10 holding outside the U.S. is French outfit Unibail-Rodamco SE. Outside the U.S., the heaviest regions covered are Australia and Japan, and those are only at about 7 percent each.
Expenses: 0.14 percent
#5: SPDR Dow Jones REIT ETF (RWR)
The RWR is another broad-based, low-cost REIT ETF that aims to cover most of the possible flavors in the real estate world. It has all the majors well covered — industrial at 25 percent, retail at 24 percent and residential at 20 percent — and also has healthy smatterings of health care, self-storage and hotel properties as well. A theme you’ll find among these REITs is similar top holdings, and that’s the case here, with SPG, PSA and PLD among the top 10. Simon is particularly heavily weighted at a little more than 9 percent. It also has a decent but unspectacular yield of 3.8 percent.
Expenses: 0.25 percent
#4: First Trust S&P REIT Index Fund (FRI)
First Trust’s entry into the REIT space is an extremely broad ETF at 159 holdings. Nonetheless, it still shares many of the similarities we discussed before, including an SPG-PSA-PLD top three holdings, with Simon at more than 7 percent of the fund. But while the top holdings are a little imbalanced, the portfolio itself is much more well-rounded than many of its peers. Retail makes up more than 23 percent of the fund’s assets, but after that, residential, office, “specialized” and health care all range around 12-16 percent. The smallest allocation? Hotels and resorts, which still enjoys a 6 percent-plus weight.
Expenses: 0.48 percent
#3: Real Estate Select Sector SPDR Fund (XLRE)
A change in the Global Industry Classification Standard in 2015 made real estate its own sector, and prompted SPDR to create real estate- and financial services-specific funds — the XLRE and XLFS. The Financials Select Sector SPDR Fund (XLF) also held real estate, but dumped those holdings in mid-2016, making the XLRE the lone Select Sector fund to invest in real estate. At 10.3 percent, SPG is a major weight among XLRE’s 29 holdings, but the fund also has a hefty communications bent, with AMT at 8.2 percent and Crown Castle International Corp. (CCI) at 5.6 percent.
Expenses: 0.14 percent (includes 115-basis-point fee waiver)
#2: Schwab U.S. REIT ETF (SCHH)
Schwab’s REIT product has cemented a place near the top of the U.S. News & World Report rankings thanks in large part to its dirt-cheap fees — 0.07 percent, or just $7 annually on very $10,000 invested. Still, despite its low cost, you’re not really sacrificing much in performance, with SCHH outdoing many of its peers over the trailing three- and five-month periods. However, you are sacrificing income, with the fund boasting a mere 2.5 percent yield based on the past year’s worth of payouts, and there’s nothing about the holdings list, which features the same 1-2-3 combo the other general REIT ETFs here.
Expenses: 0.07 percent
#1: Fidelity MSCI Real Estate Index ETF (FREL)
Fidelity’s FREL shares more in common with the XLRE than other funds on this list, thanks to its significant holdings in communications REITs AMT and CCI. However, it’s far more expansive — at 165 constituents, FREL has the widest holdings base on this list — and it’s also cheaper than XLRE. The only note on FREL is that it’s young, with little performance history, and thus little indication as to how it acts in certain environments. But only a third of the fund is invested in its top 10 holdings, so single-stock risk is less prominent than in many other REIT ETFs.
Expenses: 0.08 percent
More from U.S. News
7 of the Best ETFs to Own in 2017
7 of the Best Health Care Stocks to Buy for 2017
The 25 Best Blue-Chip Stocks to Buy for 2017
The 10 Best Ways to Buy Real Estate originally appeared on usnews.com
