Shifting market factors favor a diversified approach to the sector.
Investing in real estate can be lucrative, but it can also become a time-consuming and capital-intensive hassle. Between the down payments, taxes, repairs and insurance, managing a rental property isn’t ideal for all investors. Often, it can balloon into a second job as opposed to a truly passive income stream. For those desiring a more hands-off approach, investing in real estate investment trusts, or REITs, might be a good alternative. These publicly listed investment vehicles offer decent yields and the potential for long-term capital appreciation. Shares of REITs trade on the market like stocks and can be held in tax-advantaged accounts such as Roth individual retirement accounts. While investors can buy shares of individual REITs, a more diversified approach is to buy an exchange-traded fund, or ETF, that tracks a basket of REITs. Here’s a look at the seven best REIT ETFs to buy in 2022.
Vanguard Real Estate ETF (ticker: VNQ)
Vanguard is known for its broad lineup of passive index ETFs, and VNQ is no exception. This ETF tracks the MSCI US Investable Market Real Estate 25/50 Index, which is composed of diversified U.S.-listed REITs, including those in the health care, hospitality, industrial, office, residential and retail industries. Also included are real estate development, operating and service companies. The largest holdings in VNQ include American Tower Corp. (AMT), Prologis Inc. (PLD) and Crown Castle Inc. (CCI). Since its inception in September 2004, VNQ has returned an annualized 7.35%. Like many of Vanguard’s ETFs, VNQ is fairly cheap, costing an expense ratio of 0.12%, or $12 for every $10,000 invested annually.
Vanguard Global ex-U.S. Real Estate ETF (VNQI)
REITs aren’t just limited to the U.S. market. Holding REITs from other countries such as Canada, the U.K., Japan and China can provide investors with greater diversification. A good alternative to converting currency and buying individual international REITs is VNQI. This ETF passively tracks the S&P Global ex-U.S. Property Index, which holds REITs from more than 30 countries. Most of the ETF is concentrated in REITs from Japan (24.8%), Hong Kong (10.2%), Australia (10.6%), and China (7.3%). VNQI’s trailing 10-year performance has been rather poor, returning an annualized 0.98%. That being said, the last decade was characterized by U.S. market outperformance and the future may be different. VNQI costs an expense ratio of 0.12% as well.
iShares Core U.S. REIT ETF (USRT)
Investors who prefer BlackRock over Vanguard funds can buy USRT, which tracks the FTSE Nareit Equity REITS Index. This ETF holds 140 U.S.-listed REITs across the same industries as VNQ. However, the composition of its top holdings differs slightly, with Equinix Inc. (EQIX) and Public Storage (PSA) coming in second and third after Prologis. A good use for USRT is as a tax-loss harvesting partner for VNQ, given that both ETFs have similar holdings but track different indexes. USRT costs an expense ratio of 0.08%, which is lower than VNQ.
iShares Global REIT ETF (REET)
Investors who want a globally diversified portfolio of REITs can buy VNQ and VNQI, but this approach requires periodic rebalancing. For a one-ticker solution, investors can buy REET, which tracks REITs from U.S., international developed and international emerging markets. REET tracks the FTSE EPRA Nareit Global REITS Net Total Return Index, which holds 403 REITs. The ETF holds 72.6% U.S. REITs, with 7.6% of its portfolio from Japan, 4.2% from Australia, 3.3% from the U.K., 3.2% from Singapore and 2.9% from Canada. France, Hong Kong, Belgium and Mexico are included with less than 2% allocations each. Still, REET is dominated by U.S. REITs and has the same top-three holdings as USRT, albeit in lower concentrations. REET costs an expense ratio of 0.14%.
Schwab U.S. REIT ETF (SCHH)
Another tax-loss harvesting partner for both USRT and VNQ is SCHH, which tracks the Dow Jones Equity All REIT Capped Index. This ETF holds 135 U.S.-listed REITs and has the same top three holdings as VNQ does. Over the trailing 10 years, SCHH has returned an annualized 4.97%, compared to 6.4% for VNQ and 5.92% for USRT. That being said, past returns are not a predictor of future gains. Since all three ETFs are passively managed and track indexes, differences in performance will likely normalize over time. SCHH costs an expense ratio of 0.07%, coming in cheaper than VNQ or USRT.
Real Estate Select Sector SPDR Fund (XLRE)
State Street offers a suite of 11 “Select Sector” ETFs, each of which tracks a certain sector of stocks contained in the S&P 500 index. Unlike the previous options, XLRE only holds REITs that are included in the S&P 500. The ETF also includes real estate management and development companies but excludes mortgage REITs. As a result, XLRE is more concentrated than VNQ, USRT or SCHH, holding just 31 companies. Top holdings once again include Prologis, American Tower, Crown Castle, Equinix and Public Storage. For those seeking the name-brand recognition of the S&P 500, XLRE might be the best choice. The ETF costs an expense ratio of 0.1%.
Direxion Daily Real Estate Bull 3X Shares (DRN)
Investors looking to swing-trade REITs can use DRN, which seeks daily returns three times that of the Real Estate Select Sector Index. If the underlying index rises 1% in a day, DRN will rise by 3%. If the underlying index falls 1%, DRN will also fall by 3%. DRN is therefore a leveraged ETF. The leverage target is only accurate for a single day. If held for longer periods, the long-term returns of DRN can drift significantly due to compounding and volatility drag. Therefore, DRN is best suited for short-term traders with advanced knowledge and a healthy risk tolerance. The ETF also costs a high expense ratio of 0.96%.
7 best REIT ETFs to buy:
— Vanguard Real Estate ETF (VNQ)
— Vanguard Global ex-U.S. Real Estate ETF (VNQI)
— iShares Core U.S. REIT ETF (USRT)
— iShares Global REIT ETF (REET)
— Schwab U.S. REIT ETF (SCHH)
— Real Estate Select Sector SPDR Fund (XLRE)
— Direxion Daily Real Estate Bull 3X Shares (DRN)
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Update 11/07/22: This story was previously published at an earlier date and has been updated with new information.