Generous REIT ETFs can offer serious income for long-term investors.
As inflationary pressures continue to mount in 2022, many investors are rethinking their investing strategy to include so-called hard assets that have tangible value. The most obvious example is the old fallback of precious metals like gold and silver, but real estate is another example of an asset class that has real-world value and thus tends to do well in inflationary environments. Of course, buying an apartment complex or a shopping mall simply isn’t an option for most people. However, publicly traded real estate investment trusts, or REITs, offer you a way to buy into a share of these real estate properties just as you would buy a share of Apple Inc. (AAPL). Furthermore, these top REIT exchange-traded funds, or ETFs, offer a diversified basket of REITs to give you broad exposure to real estate investments in one simple holding. If you’re interested in gaining exposure to real property amid the inflationary pressures of 2022, you may want to consider these REIT ETFs.
Vanguard Real Estate ETF (ticker: VNQ)
A $81 billion leader in the real estate space, this REIT ETF from Vanguard is perhaps the most popular way to invest in the sector without going out and buying physical property. It’s also one of the simplest and most diversified ways to do so, with a portfolio of nearly 170 holdings spanning all manner of properties from warehouses to malls to hospitals. VNQ is also dirt cheap, as is typical of Vanguard index funds, with an expense ratio of just 0.12%, or $12 annually in fees on every $10,000 invested. And with a yield that is more than twice the S&P 500 at present, it also shows the powerful income potential of REITs.
Dividend yield: 2.9%.
Charles Schwab U.S. REIT ETF (SCHH)
A different flavor of REIT ETF, this Schwab fund boasts only about $7 billion in assets and a slightly smaller list of components. Specifically, its portfolio covers about 140 publicly traded stocks in the real estate sector, though it intentionally screens out tangentially related companies like those that invest in mortgage paper instead of physical property. This subtle distinction is very important, as mortgage-related REITs are much more susceptible to interest rate risks — and as a result, SCHH has tacked on 18% over the last 12 months compared with only 13% or so for VNQ, which does include these companies. Particularly in 2022 as we deal with interest rate volatility, this could be a good alternative among REIT ETFs. You do leave a bit of yield on the table, but the performance edge could be worth it.
Dividend yield: 1.7%.
iShares Mortgage Real Estate Capped ETF (REM)
Of course, some investors may not be too afraid of volatility in share prices if they can, in turn, tap into the mammoth yields offered by mortgage-related REITs. That’s what this iShares fund offers by cutting out the rest of the REIT universe and instead just zeroing in on this group. To be clear, the 30 or so stocks in this fund, such as Annaly Capital Management Inc. (NLY) and Starwood Property Trust Inc. (STWD), have faced stiff headwinds as they have been forced to adapt to higher borrowing costs and the threat of rising rates. And as a result, REM is actually down about 8% in the last year while most diversified REITs are at least slightly in the green. Still, if you like the 6% yield or you think the worst of the negativity is priced in, this mortgage-related play could be an interesting option.
Dividend yield: 6%.
Real Estate Select Sector SPDR Fund (XLRE)
Another major REIT ETF that’s only got a short list of components, this fund doesn’t bother with a fulsome list of real estate firms. But the difference is that its focused portfolio is biased wholly toward REITs with size, and is composed of the largest 30 or so names in the space. Right now, those names include $115 billion warehouse giant Prologis Inc. (PLD) and $110 billion telecom real-estate operator American Tower Corp. (AMT), as two big-time examples. It’s not particularly sophisticated, so there are risks with this focused approach, but the yield is on par with other funds even as it offers one of the cheapest fee structures in the space with annual expenses of just 0.10%.
Dividend yield: 3%.
Global X SuperDividend REIT ETF (SRET)
Yet another selective REIT ETF is this Global X option, which is less concerned about the kind of real estate business that it’s investing in and more concerned with a quest for big-time dividends. That means the 30 or so stocks that make up this fund don’t have a heck of a lot in common beyond being REITs with big payouts. By way of example, SRET includes over-the-counter stocks such as Mapletree North Asia (MTGCF), a Singapore-based office operator, alongside U.S. retail real estate giant W.P. Carey Inc. (WPC). The result is a unique REIT ETF that throws off considerably higher income than some of its peers.
Dividend yield: 6.8%.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
The smallest REIT ETF on this list, with less than $500 million in total assets at present, INDS offers a unique and tactical play on the space, in that it avoids the typical areas of real estate like malls or residential housing. Instead, it’s focused squarely on utilitarian sites and industrial real estate. And interestingly enough, thanks to inflationary pressures as well as a strong global recovery in the wake of COVID-19, this has been one of the most lucrative areas of the real estate market; INDS is up an impressive 28% in the last 12 months. That’s double many of the more diversified REIT ETFs. The yield is a bit less pronounced, but the share price appreciation makes this pick worth a look nevertheless.
Dividend yield: 1.5%.
Vanguard Global Ex-U.S. Real Estate ETF (VNQI)
One final element of real estate investing worth considering is geographic diversification outside of the U.S. Sure, many of the big-name REITs you’re likely most familiar with are domestic companies, but it’s a great big world out there — with plenty of real estate opportunities overseas. VNQI is an “ex-U.S.” fund that specifically excludes U.S. players, so it’s a perfect way to layer in international exposure. The fund has about 700 stocks, too, scattered around the world in a truly diverse strategy that includes 21% of assets in Japan, 20% in “developed” European countries, such as France and Germany, and no other region with more than about 16% or so at present. With roughly $5 billion in assets under management, this is a popular and liquid fund that can offer an extra layer of diversification in your real estate holdings — and a huge dividend yield to boot.
Dividend yield: 6.8%.
7 best REIT ETFs to buy:
— Vanguard Real Estate ETF (VNQ)
— Charles Schwab U.S. REIT ETF (SCHH)
— iShares Mortgage Real Estate Capped ETF (REM)
— Real Estate Select Sector SPDR Fund (XLRE)
— Global X SuperDividend REIT ETF (SRET)
— Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
— Vanguard Global Ex-U.S. Real Estate ETF (VNQI)
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Update 03/29/22: This story was published at an earlier date and has been updated with new information.