Shifting market factors favor a diversified approach to the sector.
Any discussion about real estate investment trusts, or REITs, has to begin with a confession: The sector is struggling mightily in 2022. Of the roughly 30 or so REITs that are part of the S&P 500 index, a whopping 29 are down by 15% or more year to date as of Sept. 28. That’s in large part because of macroeconomic conditions, including interest rates that are pushing up borrowing costs for these capital-intensive real estate firms, rather than conditions at individual companies. But the fact remains that REITs are generous dividend payers and still have a place in well-rounded portfolios. So if you’re interested in playing the sector, a diversified approach using one of these popular REIT ETFs may be the best way forward to smooth out any inevitable bumps in the road across the rest of the year.
Vanguard Real Estate ETF (ticker: VNQ)
Hands down, VNQ is the leader among REIT ETFs with more than $33 billion in total assets under management and average daily volume that tops 4 million shares traded. It’s incredibly wide, comprising about 170 holdings that include telecom infrastructure play American Tower Corp. (AMT), warehouse operator Prologis Inc. (PLD) and data center operator Equinix Inc. (EQIX) in addition to more traditional office building or shopping mall operators. If you’re looking for a simple way to play REITs, this liquid and diversified offering is the go-to option.
Dividend yield: 3.1%
Schwab U.S. REIT ETF (SCHH)
Though the runner-up among diversified REIT ETFs, this Schwab fund is no slouch with an impressive $5 billion in assets. It’s also remarkably cheap at just 0.07% in annual expenses, or a mere $7 per year on every $10,000 invested. Its portfolio differs slightly from the prior Vanguard fund, with a smaller list of about 130 publicly traded real estate stocks, thanks in part to the exclusion of mortgage-related and hybrid REITs that hold financial instruments instead of physical property. This subtle difference and narrower portfolio has resulted in a bit better performance than VNQ year to date, even if it adds up to a lower overall yield.
Dividend yield: 2.1%
Real Estate Select Sector SPDR Fund (XLRE)
Next in line among leading REIT ETFs is this sector SPDR fund with almost $5 billion in assets. Despite being right up there with Schwab and Vanguard, however, it offers a much narrower range of real estate companies with a total portfolio of just 30 or so stocks. The top holdings are similar, but the weightings are much more dramatic; the top three holdings alone represent about 28% of the entire portfolio. That focus hasn’t resulted in an overly aggressive risk profile, and based on the current yield, it isn’t limiting the income potential, either. If you simply want to buy the biggest REIT stocks and ignore the smaller also-rans, XLRE is a simple way to do so.
Dividend yield: 3%
Vanguard Global ex-U.S. Real Estate ETF (VNQI)
An international REIT ETF, VNQI differs significantly from the prior funds. As an “ex-U.S” fund, this Vanguard option excludes any real estate holding in the U.S., which adds up to a wide portfolio of about 700 holdings. Geographically, the leading region is Japan with 24% of assets followed by 11% in Australia and then 10% in Hong Kong. These companies tend to be more generous with dividends, adding up to a yield that is more than two times the typical U.S. REIT ETF. And keep in mind that if you like the yield but still want some exposure to the U.S. REIT sector, you can easily layer on VNQI without duplicating holdings since it doesn’t overlap at all with any domestic-focused ETF.
Dividend yield: 8%
Pacer Benchmark Data & Infrastructure Real Estate Sector ETF (SRVR)
A more targeted REIT that plays only part of this sector, this Pacer fund is focused only on digital-related infrastructure properties. This includes leading telecom tower REITs like Crown Castle Inc. (CCI) and American Tower Corp. (AMT) but also firms like Equinix Inc. (EQIX) and Digital Realty Trust Inc. (DLR) that house servers hosting information that lives off-site and in the cloud. With nearly $1 billion in assets, SRVR is an established fund even if it’s quirky. But keep in mind that when it comes to yield, the ETF is decidedly lacking when compared to more diversified options in the sector.
Dividend yield: 1.3%
iShares Mortgage Real Estate Capped ETF (REM)
Though a particularly ugly performer in recent weeks, REM is worth noting because of its big-time yield — and, if you believe some of the bulls out there, it’s big-time rebound potential. This $600 million mortgage-focused REIT ETF is focused on companies that don’t own physical offices, hospitals or warehouses but instead traffic in mortgage debt. That’s risky for two big reasons: First, mortgage-related REITS suffer from lower margins in a rising interest rate environment thanks to increases in borrowing costs. Second, any widespread downturn that precedes a wave of missed payments or foreclosures will have serious negative consequences for companies holding mortgage paper. REM relies on a small group of mortgage-related REITs with about 30 positions in the portfolio at present. But all are in the same corner of the market and will move in lockstep — up or down — so keep in mind this has a higher risk profile than some of the other REIT ETFs on this list as a trade-off for its large dividend.
Dividend yield: 7.5%
iShares Residential & Multisector Real Estate ETF (REZ)
If you don’t like the intangible nature of mortgage REITs but are still primarily interested in residential real estate, then the nearly $1 billion REZ fund offers a unique option. While some health care and self-storage enterprises pop up thanks to the “multisector” portion of this fund, it is decidedly less exposed to the challenges of commercial real estate or industrial REITs. The yield is lower as a result of this shift, but if you want to focus on real property instead of businesses that happen to be structured as a REIT and rely on outside economic trends, REZ is worth a look.
Dividend yield: 1.9%
7 best REIT ETFs to buy:
— Vanguard Real Estate ETF (VNQ)
— Schwab U.S. REIT ETF (SCHH)
— Real Estate Select Sector SPDR Fund (XLRE)
— Vanguard Global ex-U.S. Real Estate ETF (VNQI)
— Pacer Benchmark Data & Infrastructure Real Estate Sector ETF (SRVR)
— iShares Mortgage Real Estate Capped ETF (REM)
— iShares Residential & Multisector Real Estate ETF (REZ)
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7 Best REIT ETFs to Buy originally appeared on usnews.com
Update 09/29/22: This story was published at an earlier date and has been updated with new information.
