Commercial real estate offers investors unrivaled opportunities for dependable current income and the potential for capital appreciation. Despite elevated interest rates and persistent inflation worries, the U.S. and world economies are expanding at a healthy rate. Income-producing buildings such as apartment buildings, self-storage properties and warehouses are in great demand today and should remain high for the foreseeable future.
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What Are REITs?
Real estate investment trusts, or REITs, are specialized companies that buy, hold and manage commercial real estate on behalf of their investors. REITs that own and operate real estate directly are called equity REITs. REITs that invest in or originate commercial real estate mortgages or hold residential or commercial real estate mortgage bonds are called mortgage REITs, or mREITs. Companies that own real estate directly and own financial instruments are known as hybrid REITs.
To maintain their status as REITs and avoid paying income taxes at the corporate level, REITs must, by law, distribute at least 90% of their after-tax income back to investors. For publicly traded REITs, this means paying a steady income to shareholders through regularly scheduled dividend distributions.
REITs should be primarily seen as income vehicles, but there is a great potential for capital appreciation over time.
What Are the Benefits of REIT ETFs?
REITs were introduced to the investing public over 60 years ago. Since that time they’ve become very popular with income-oriented investors. There are over 200 REITs that trade on U.S. exchanges, and those companies represent hundreds of billions in market capitalization. The REIT landscape can be confusing to individual investors looking for reliable income and growth over the long run.
ETFs that invest in REITs are designed to make REIT investing simple and convenient for all investors. REIT ETFs provide quality professional management — experts choose the REITs to invest in — and offer broad diversification geographically and among real estate asset classes.
For retail investors saving for retirement or for other long-term goals, REIT ETFs are often the best way to own REITs.
What Are the Best REIT ETFs to Buy Now?
REIT ETFs can be excellent long-term investments. Many offer reliable income and superior dividend yields. REIT ETF portfolio managers are counted among the brightest minds in the commercial real estate investment industry. Considering these factors, current economic conditions and the state of the real estate industry, here are seven of the best REIT ETFs you should consider buying and holding for the rest of 2024 and well beyond:
| REIT ETF | Trailing Dividend Yield |
| Real Estate Select Sector SPDR Fund (ticker: XLRE) | 3.7% |
| iShares Mortgage Real Estate Capped ETF (REM) | 10.1% |
| Vanguard Real Estate ETF (VNQ) | 4.3% |
| Invesco Active U.S. Real Estate Fund (PSR) | 3.4% |
| iShares Global REIT ETF (REET) | 3.5% |
| Nuveen Short-Term REIT ETF (NURE) | 4% |
| Global X SuperDividend REIT ETF (SRET) | 8.1% |
Real Estate Select Sector SPDR Fund (XLRE)
XLRE is a very popular $5.4 billion REIT ETF in State Street Global Advisors’ SPDR family of index ETFs. With an expense ratio of only 0.09%, XLRE can be safely categorized as a low-cost index fund.
This fund tracks the S&P Real Estate Select Sector Index, and it does so with very little tracking error. The index that XLRE is based on is a subset, or sub-index, of the S&P 500. It represents just the 35 stocks of the S&P 500 that are in the real estate sector of the economy.
Investors should be aware that XLRE is designed to provide exposure to REITs that directly own, manage and develop commercial real estate. There are no mREITs or hybrid REITs in this fund.
XLRE holds less than 40 individual REITs. This means it’s somewhat less diversified than other large REIT ETFs, many of which have over 100 holdings. This fund is suitable for investors seeking a more narrow and more targeted approach to real estate investing.
Trailing yield: 3.7%
iShares Mortgage Real Estate Capped ETF (REM)
REM is a high-yielding mREIT that mirrors the FTSE Nareit All Mortgage Capped Index. After subtracting the fund’s expense ratio of 0.48%, REM should track its benchmark very closely.
REM invests in both residential and commercial mortgage REITs. The REITs in REM and in the index own bonds in the form of commercial mortgage backed securities (CMBS) or residential mortgage backed securities (RMBS) or, alternately, originate commercial mortgage loans.
As an example of a typical holding, just over 16% of the fund’s $587 million in assets is invested in Annaly Capital Management Inc. (NLY).
REM is appropriate for investors who want dual exposure to the residential and commercial sectors in a single ETF and are looking for a diversified fund to target the domestic real estate market.
Trailing yield: 10.1%
Vanguard Real Estate ETF (VNQ)
VNQ is a $59 billion index ETF designed to track the MSCI U.S. Investable Market Real Estate 25/50 index. That index and, subsequently, VNQ hold just under 160 publicly-traded REITs, all based in the U.S. and all trading on major U.S. exchanges.
VNQ is managed by Vanguard Equity Index Group, an asset manager known for high-quality, low-cost index funds. VNQ is no exception. The fund has an expense ratio of just 0.12%. Even after subtracting fees, investors can expect VNQ to track its benchmark closely.
Close to 20% of the fund’s assets are invested in communication tower REITs and data center REITs. The world is becoming more interconnected everyday. Thanks to the growth of 5G communications and the widespread adoption of artificial intelligence technology, the demand for cellphone towers and server farms has never been greater. This makes VNQ a very timely investment.
Trailing yield: 4.3%
Invesco Active U.S. Real Estate Fund (PSR)
PSR is unique among REIT ETFs. This fund is an actively managed investment, but its portfolio managers rely on sophisticated statistical and quantitative measures to choose the REITs they invest in. In short, PSR is a “quant” REIT ETF.
The REITs bought by PSR are selected from the components of the FTSE NAREIT All Equity REIT Index. As the name of that benchmark implies, there are no mREITs or hybrid REITs in the fund.
The algorithms and formulas applied to the REITs in the index are designed to identify those that have the best overall potential for income and growth, after taking risk and volatility into account.
This $62 million fund puts equal emphasis on growth and income factors. For this reason, PSR can be seen as having a total-return perspective. The fund is evaluated constantly and is reoriented to the index monthly. The high level of active management accounts for the fund’s 0.35% expense ratio.
Trailing yield: 3.4%
[READ: 7 Best Large-Cap ETFs to Buy in 2024]
iShares Global REIT ETF (REET)
REET may not be suitable for conservative investors, but it could be an excellent choice for more aggressive income seekers. REET seeks to capitalize on the income and growth potential of real estate in developing countries and emerging market nations.
REET is a $3.3 billion indexed ETF designed to track the FTSE EPRA NARIET Global Net Total Return Index. Many global funds come with correspondingly high expenses, but REET is reasonably priced compared to some of its peers. The fund’s expense ratio is just 0.14%.
All of the REITs held in REET have a global reach and have a footprint in emerging markets. This fund should be purchased in order to diversify a portfolio and benefit from global real estate opportunities.
Trailing yield: 3.5%
Nuveen Short-Term REIT ETF (NURE)
If you like REITs but don’t like the volatility that sometimes accompanies real estate investing, NURE may be the right REIT ETF for you.
NURE is a small fund — it has just $47 million in assets under management — but it’s well run and has a unique approach to commercial real estate investing. The portfolio mangers at Nuveen attempt to mitigate and temper volatility by holding REITs that have relatively short-term lease agreements with their corporate tenants.
The fund mostly invests in apartment buildings, hospitality properties, self-storage facilities, and mobile home and RV parks. It chooses these property types because they have shorter leases than most other real estate classes. The rationale behind this approach is the belief that shorter leases result in less fluctuation in property values as compared to longer-term leases.
Like most of the other ETFs on our list, NURE is an index fund. It is based on the Dow Jones U.S. Select Short-Term REIT Index. The expense ratio comes in at 0.35%.
Trailing yield: 4%
Global X SuperDividend REIT ETF (SRET)
Global X is an asset manager known for its innovative and sometimes aggressive investment strategies. SRET is a Global X fund with $209 million in assets.
SRET has a high income compared to most other REIT ETFs. This is because the fund is based on the Solactive Global SuperDividend REIT Index. This highly targeted, very selective index comprises the 30 highest dividend yielding REITs globally.
Of particular interest to income investors is the fact that SRET distributes dividend income on a monthly rather than a quarterly basis.
Because of the global nature of the fund’s investments, SRET can be quite volatile and may underperform in a rising or stagnating interest rate environment. On the other hand, there is the potential for excellent capital appreciation if and when rates fall. In either case, the fund’s superior yield should enhance total return over the long run. Note that the fund has an expense ratio of 0.59%.
Trailing yield: 8.1%
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7 of the Best REIT ETFs to Buy for 2024 originally appeared on usnews.com
Update 05/14/24: This story was published at an earlier date and has been updated with new information.
