Risk-off investors may find comfort in high-yield REIT ETFs.
Many asset classes are in turmoil as bonds are upended by a changing interest rate environment and stocks are giving investors ulcers with extreme volatility. However, real estate remains one of the most solid and sure-fire long-term investments you can make. By way of example, the National Association of Realtors recently predicted housing prices may climb 5.7% through the end of 2022. Unfortunately, most of us can’t afford to just go out and buy a bunch of additional properties. But what we can do is invest in real estate via REITs — publicly traded real estate investment trusts that offer exposure to physical property, and a mandate for big dividends.
Vanguard Real Estate ETF (ticker: VNQ)
The runaway leader in the sector with $47 billion in net assets, this REIT exchange-traded fund from Vanguard is the most popular way to invest in real estate 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 real estate investment trusts.
Dividend yield (trailing twelve months): 2.9%
Charles Schwab U.S. REIT ETF (SCHH)
Though the runner-up among diversified REIT ETFs, this Schwab fund still boasts more than $6 billion in assets and is a legitimate and liquid investment, too. Its portfolio differs slightly, with a smaller list of about 140 publicly traded real estate stocks real estate stocks, though it intentionally screens out mortgage-related REITs that hold financial instruments instead of physical property. This subtle distinction is very important, as mortgage-related REITs are much more susceptible to interest rate risks — but also much more generous with yield. The result is that SCHH has fared a bit better in the admittedly rocky environment of 2022, but it currently yields slightly more than the broader S&P 500 index. If you’re interested in REITs for stability, this may be worth a look, but keep in mind the below-average yield when compared with other ETFs on this list.
TTM dividend yield: 1.7%
Real Estate Select Sector SPDR Fund (XLRE)
Another major REIT ETF that offers a wide look at the space is XLRE, a more than $5 billion fund that covers a variety of top real estate companies. But while the business lines of its constituent parts vary widely, including warehouse giant Prologis Inc. (PLD), telecom tower operator American Tower Corp. (AMT) and self-storage giant Public Storage Inc. (PSA) as top components, it’s worth noting the entire portfolio is limited to just the largest 30 or so names in the space. Annual expenses are dirt cheap as a result of this simple approach, with fees of just 0.1% a year, or $10 on every $10,000 invested. But there is a bit more risk involved with such a focused approach to REIT investing.
TTM dividend yield: 2.7%
iShares Mortgage Real Estate ETF (REM)
Looking beyond the diversified REIT funds, some investors may not be too afraid of taking on a bit more risk and volatility in discrete areas of this sector if it means they can harness outsize yield. That’s what this iShares fund offers, cutting out the rest of the REIT universe and instead just zeroing in on a group of mortgage-related REITs. The 30 or so stocks in this fund, such as Annaly Capital Management Inc. (NLY) and Starwood Property Trust Inc. (STWD), admittedly face headwinds from higher borrowing costs, thanks to rising rates pinching margins for these debt-focused companies. However, with REM down about 10% year to date compared with a 12% decline in the same period for the S&P 500, it’s not like this subsector faces risk while the rest of Wall Street is booming. And with a mammoth yield that is about five times that of the S&P 500, the risk may be worth the reward for income-hungry investors.
TTM dividend yield: 7%
Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
Another tactical REIT, though admittedly one with much smaller income potential than any others on this list, is this Pacer fund that boasts over $1 billion in assets under management and a mission to focus only on digital-related infrastructure properties. This may seem obtuse at first, but the reality is that all that information that lives in the cloud has to actually be housed in physical servers somewhere — and the companies that make up SRVR represent the biggest data facilities in the U.S. Roughly two dozen components, including Equinix Inc. (EQIX) and Digital Realty Trust Inc. (DLR), make up the portfolio along with other telecom and wireless players. If you want a tech-focused REIT fund, this is your best bet.
TTM dividend yield: 1%
Vanguard Global Ex-U.S. Real Estate ETF (VNQI)
Another strategy for real estate investors is to look beyond big domestic names and open your portfolio to REITs that operate overseas. VNQI is a great way to do that, as it is an “ex-U.S.” fund that specifically excludes U.S. companies. That makes it the perfect way to layer in international exposure without duplicating positions in other investments — even if you already own a popular REIT ETF like Vanguard’s domestically focused VNQ. About 700 stocks make up the portfolio of this offering, scattered around the world in a truly diverse strategy that includes about 27% in European markets such as France and Germany, 21% of assets in Japan and a decent 18% or so in emerging markets with big growth potential. The diversification is a big reason to consider VNQI as part of your REIT strategy, but the huge dividend yield certainly doesn’t hurt.
TTM dividend yield: 7.2%
Invesco S&P 500 Equal Weight Real Estate ETF (EWRE)
Can’t decide whether you want to make a bet on different slices of the domestic REIT market? Then consider this Invesco fund that takes an equal-weight approach. With a short list of 30 prominent stocks but regular rebalancing to ensure no single REIT represents significantly more of the portfolio than anything else, you get a wide swath of the market but avoid reliance on a single firm or a single kind of company. EWRE has performed slightly better than the broader market thanks in part to this approach, but keep in mind the strategy also limits the yield it can produce by not giving preferential treatment to the more generous REITs on Wall Street.
TTM dividend yield: 2.4%
7 best REIT ETFs to buy:
— Vanguard Real Estate ETF (VNQ)
— Charles Schwab U.S. REIT ETF (SCHH)
— Real Estate Select Sector SPDR Fund (XLRE)
— iShares Mortgage Real Estate Capped ETF (REM)
— Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
— Vanguard Global Ex-U.S. Real Estate ETF (VNQI)
— Invesco S&P 500 Equal Weight Real Estate ETF (EWRE)
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Update 05/10/22: This story was published at an earlier date and has been updated with information.