Real estate investment trusts, or REITs, are specialty companies that own and operate real estate or financial instruments such as mortgages or mortgage bonds that are tied to commercial real estate. Investors buy REITs for two primary reasons: Dependable income and the potential for long-term capital appreciation.
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REITs that own commercial or residential buildings directly are called equity REITs. They earn money by collecting rent on the property they own. Mortgage REITs, also called, mREITs, don’t collect rent; instead, they earn interest income on the money they invest in debt instruments. REITs that hold both real property and financial instruments are called hybrid REITs.
All REITs are required by law to distribute 90% or more of their taxable income to shareholders in the form of dividends.
REIT exchange-traded funds, or ETFs, are a type of fund that invests in publicly traded REITs and whose shares trade on exchanges like stocks. Because they can hold dozens of REITs that might own several classes of real estate, REIT ETFs offer investors enhanced levels of diversification along with the benefit of professional management.
Here’s our list of seven of the best REIT ETFs you should buy this year:
| REIT ETF | Trailing-12-month yield |
| Schwab U.S. REIT ETF (ticker: SCHH) | 3.4% |
| Real Estate Select Sector SPDR Fund (XLRE) | 3.5% |
| iShares Core U.S. REIT ETF (USRT) | 3.3% |
| iShares Mortgage Real Estate Capped ETF (REM) | 9.9% |
| Invesco Active U.S. Real Estate Fund (PSR) | 3.1% |
| Dimensional Global Real Estate ETF (DFGR) | 2.9% |
| Fidelity MSCI Real Estate Index ETF (FREL) | 3.9% |
Schwab U.S. REIT ETF (SCHH)
Investors looking for a straightforward, low-cost REIT ETF should look to SCHH. This $6 billion ETF is based on the Dow Jones Equity All REIT Capped Index. This popular REIT index purposefully excludes mREITs, hybrid REITs and non-REIT real estate stocks.
The SCHH portfolio has 122 REIT holdings. Notably, more than 13% of the fund’s assets are invested in telecommunications tower REITs. Their largest position is in Prologis Inc. (PLD), which represents 9.4% of the fund’s assets.
SCHH keeps internal trading to a minimum in an effort to provide shareholders with as much tax efficiency as possible. This also helps control costs, which might be one reason for the very low 0.07% expense ratio.
Trailing-12-month yield: 3.4%
Real Estate Select Sector SPDR Fund (XLRE)
XLRE is an ETF in the SPDR family of funds that mirrors the S&P Real Estate Select Sector Index. Because of the fund’s low 0.09% expense ratio, investors can expect XLRE to track the performance of the underlying index very closely.
This $5 billion ETF has a special focus on real estate management and development. There are no mREITs in XLRE. The fund is designed for investors seeking to make a tactical allocation to the real estate sector of the S&P 500.
Almost 10% of the fund’s assets are invested in American Tower Corp. (AMT), which is consistent with the fact that XLRE is weighted 45% toward specialty REITs.
Trailing-12-month yield: 3.5%
iShares Core U.S. REIT ETF (USRT)
The FTSE Nareit Equity REITs Index is a broad-based REIT index designed to reflect the performance of publicly traded U.S. equity REITs. USRT is a $2 billion ETF based on that index.
USRT is designed to mirror the performance of the underlying index after assessing fees and expenses. The fund has a very reasonable expense ratio of 0.08%.
The iShares family of ETFs is owned and operated by the asset management giant BlackRock Inc. (BLK). Investors can expect that the fund will be managed professionally and offer ample market liquidity.
Based on changes to net asset value (NAV) and accounting for distributions, USRT had a one-year total return of 13.6% for the period ending Dec. 31, 2023. The fund distributes income dividends quarterly.
Trailing-12-month yield: 3.3%
iShares Mortgage Real Estate Capped ETF (REM)
REM is a high-yielding mortgage REIT ETF based on the FTSE Nareit All Mortgage Capped Index. This fund will appeal to investors looking for superior dividend income and targeted exposure to U.S.-based residential and commercial mortgages.
This $617 million ETF holds 33 separate mortgage REITs that invest in both residential and commercial mortgages and mortgage bonds. As some representative examples, 17% of the fund’s assets are invested in Annaly Capital Management Inc. (NLY), 11% are in AGNC Investment Corp. (AGNC) and 10% are in Starwood Property Trust Inc. (STWD).
The U.S. and other developed economies have endured rising interest rates for much of the last three years. This hasn’t been good for the NAV of mortgage REITs or mortgage REIT ETFs like REM. Many experts, however, are predicting a reversal in the rate cycle. If rates do decline in the future, shareholders of REM should be rewarded with significant price appreciation.
Trailing-12-month yield: 9.9%
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Invesco Active U.S. Real Estate Fund (PSR)
Two factors make PSR a unique and interesting ETF. The first is that it is an actively managed ETF that chooses its investments from an indexed universe of REITs. The second is that PSR is managed quantitatively.
In practical terms, what that means is that the portfolio managers use powerful, artificial intelligence-driven algorithms and statistical models to pick individual REITs from within the FTSE NAREIT All Equity REIT Index.
The formulas PSR uses were designed to identify REITs with the best risk-adjusted potential for dependable dividend income and sustained growth over time. PSR is an $81 million fund with a very active management style. All holdings are evaluated monthly to ensure they meet the strict investment criteria.
Trailing-12-month yield: 3.1%
Dimensional Global Real Estate ETF (DFGR)
DFGR has a stated investment objective of capital appreciation. This does not mean that the fund neglects all income considerations, but it does mean that DFGR is appropriate for investors with growth rather than income as their primary goal.
DFGR does not limit its investing to U.S. REITs. Instead, it seeks quality real estate investments from around the globe, including in developing and emerging market countries. For this reason, investors should consider this ETF an aggressive investment with high volatility. DFGR invests in REITs of all sizes.
Despite its growth orientation and aggressive management style, DFGR has attracted over $1.4 billion in assets. DFGR has an expense ratio of 0.22%, which is reasonable for an actively traded, global fund.
Trailing-12-month yield: 2.9%
Fidelity MSCI Real Estate Index ETF (FREL)
FREL is a $950 million ETF operated by Fidelity Investments, one of the largest asset managers in the country. The fund tracks the MSCI USA IMI Real Estate 25/25 Index. This ETF has a very low expense ratio of 0.08%, which allows FREL to closely track the performance of that index.
FREL is a modified, cap-weight ETF that invests in small-cap, mid-cap and large-cap U.S. REITs. The fund has 152 REIT holdings that cover 12 different commercial real estate classes, with retail, industrial, telecom towers and data centers being the most prominent. About 5.8% of the fund’s assets are invested in the digital infrastructure real estate firm Equinix Inc. (EQIX).
The fund distributes regular dividends quarterly and has a yield approaching 4%. With its relatively large number of holdings across many real estate asset classes, FREL offers investors excellent diversification.
Trailing-12-month yield: 3.9%
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7 of the Best REIT ETFs to Own in 2024 originally appeared on usnews.com
Update 02/15/24: This story was previously published at an earlier date and has been updated with new information.
