Investors looking for reliable dividend income and the potential for sustained capital appreciation over time may want to consider adding a real estate component to their portfolios. One of the best ways to do that is to buy good quality REIT ETFs and hold them for the long run.
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What Are REITs?
A REIT is a specialty company more formally known as a real estate investment trust. REITs own, build and operate commercial real estate or, alternatively, own financial instruments such as commercial real estate mortgages or real estate-secured loans that impart an equity interest in commercial property.
REITs that own or develop property directly are called equity REITs. REITs that own or originate financial instruments are called mortgage REITs and go by the acronym mREIT. If a REIT invests in both loans and real property, it’s called a hybrid REIT.
The primary reason investors buy and hold REITs is to gain exposure to the commercial real estate sector and access to the income and growth potential that asset class provides.
Why Buy REIT ETFs?
Exchange-traded funds, or ETFs, are one of the most popular and convenient ways to invest in the domestic and international capital markets. A REIT ETF is a unique type of ETF that specializes in investing in publicly traded REITs.
The portfolio managers who manage these popular investments are experts in commercial real estate in general and REITs in particular. They often rely on broad-based REIT indexes or benchmarks to select the REITs that go into their ETF portfolios. Any given REIT ETF might hold dozens or even hundreds of individual REITs that might themselves own several different categories of commercial properties.
REIT ETFs are a smart investment for most retail investors. They provide professional REIT selection and excellent diversification in a single, highly liquid security that trades like an individual stock.
What Are the Best REIT ETFs to Buy?
There are more than 50 quality REIT ETFs issued and sponsored by credible asset managers trading on major U.S. exchanges today. Choosing the right ones to complement your portfolio can be a difficult undertaking. But don’t worry, there are many fund companies, brokers and financial publications that can help.
Pick REIT ETFs with substantial assets under management that are sponsored by established asset management firms with solid reputations for expertise and customer service. Also, don’t neglect the important principle of diversification. Spread out your risk by investing in ETFs that own a wide variety of real estate classes.
You will find this list of the seven best REIT ETFs to buy now a great place to start. It includes broad-based indexed and actively managed equity REIT and mREIT ETFs.
| REIT ETF | Dividend Yield |
| Schwab U.S. REIT ETF (ticker: SCHH) | 3.3% |
| iShares Core U.S. REIT ETF (USRT) | 3.2% |
| SPDR Dow Jones International Real Estate ETF (RWX) | 4.1% |
| iShares Mortgage Real Estate Capped ETF (REM) | 9.8% |
| The Real Estate Select Sector SPDR Fund (XLRE) | 3.5% |
| Invesco Active U.S. Real Estate Fund (PSR) | 3.2% |
| Fidelity MSCI Real Estate Index ETF (FREL) | 3.7% |
Schwab U.S. REIT ETF (SCHH)
First on the list is SCHH. This $6.3 billion REIT ETF offers investors a straightforward, low-cost way to invest in a broad selection of domestic real estate companies.
SCHH is an index fund that mirrors the Dow Jones Equity All REIT Capped Index. This ETF is well diversified both geographically and by real estate class. SCHH currently has 119 REIT holdings, the largest being the transportation logistics REIT Prologis Inc. (PLD), which represents just over 8% of the market value of the fund.
SCHH strives to be a tax-efficient ETF. To this end, they keep internal trading to a bare minimum. This also helps keep costs down: SCHH has a low expense ratio of 0.07%.
An important aspect of SCHH is that it purposefully excludes mREITs and hybrid REITs. The underlying index and this fund are made up of strictly equity REITs.
12-month yield: 3.3%
iShares Core U.S. REIT ETF (USRT)
USRT is a $2.4 billion ETF based on the broad-based FTSE Nareit Equity REITs Index. The objective of that benchmark is to reflect the performance of the publicly traded equity REIT index. After subtracting the reasonable expense ratio of 0.08%, USRT should mirror the index with very little tracking error.
BlackRock Inc. (BLK) owns the very popular iShares family of ETFs that is the sponsor of USRT. This means individual investors can expect a high level of professionalism from this money manager and excellent market liquidity from this fund.
According to this fund’s product page on the iShares website, USRT had a 1-year total return of 10.37% based on market price for the period ending March 31 and a 10-year total return of 6.52% based on the same metrics. Like most income-oriented ETFs, USRT distributes dividends quarterly.
12-month yield: 3.2%
SPDR Dow Jones International Real Estate ETF (RWX)
Investors looking for real estate exposure outside the U.S. should consider RWX.
RWX is a $278 million fund designed to track the Dow Jones Global ex-U.S. Select Real Estate Securities Index. That index is unique among real estate benchmarks in that it is a float-adjusted market cap index that bases its allocation on the size of a REIT’s public float, or number of shares available for trading, as well as standard market capitalization. The index and, as a consequence, RWX, acts as a highly reliable reflection of the real estate sector around the world, excluding, of course, the U.S.
The index composition is reviewed and can change quarterly. If the index changes, RWX will follow suit. This can result in a higher level of internal trading compared to some other index ETFs.
Also, mREITs and hybrid REITs do not appear in the benchmark or the fund.
Investors need to be aware that international investing carries a somewhat higher degree of risk than domestic investing. RWX shareholders should expect a higher level of volatility.
12-month yield: 4.1%
[Read: Best Places to Invest In Real Estate in 2024]
iShares Mortgage Real Estate Capped ETF (REM)
REM is an mREIT. The fund tracks the FTSE Nareit All Mortgage Capped Index which is a popular benchmark that was developed to track the overall performance of mREITs that trade on the New York Stock Exchange, the American Stock Exchange and the Nasdaq exchange.
REM invests in both of the two major types of mortgage-backed securities, or MBS. In other words, they hold commercial mortgage-backed securities (CMBS) as well as residential mortgage-backed securities (RMBS).
As an example of how this $610 million ETF invests its assets, the fund holds over $97 million by market value of Annaly Capital Management Inc. (NLY) and over $65 million of AGNC Investment Corp. (AGNC).
REM is an excellent choice for income investors who want exposure to both the residential and the commercial real estate sectors, desire a superior yield and can handle the volatility that comes with fixed-income investing.
12-month yield: 9.8%
The Real Estate Select Sector SPDR Fund (XLRE)
XLRE is a popular ETF in the well-known SPDR family of funds. This $5.8 billion fund has an interesting and potentially profitable focus. It concentrates on real estate development and long-term property management.
XLRE mirrors the S&P Real Estate Sector Index and, due to the fund’s low expense ratio of 0.09%, tends to track that benchmark quite closely.
This fund should be especially considered by investors looking to make a tactical allocation to real estate companies that are components of the S&P 500. There are no mREITs in the index and, therefore, investors won’t find them included in XLRE.
Over 28% of the fund’s assets are currently invested in the telecommunications and data center sectors, making the fund well positioned for the high level of long-term growth that can be expected in those industries.
12-month yield: 3.5%
Invesco Active U.S. Real Estate Fund (PSR)
PSR is distinct among the other REIT ETFs on this list for two important reasons. First, it is an actively traded ETF. Secondly, it’s a quant fund, meaning it is managed on a quantitative basis.
What this means to potential shareholders is that the REITs in PSR are selected using innovative, artificial intelligence (AI)-backed algorithms that are based on highly sophisticated statistical models.
All REITs in PSR are selected from components of the FTSE Nareit All Equity Index. The portfolio managers at PSR continuously subject the REITs in that index to the quantitative formulas they’ve designed. This extensive computerized scrutiny identifies stocks that have the best risk-adjusted potential for strong growth and dependable income.
PSR has $60 million in assets and is actively traded, which accounts, in part, for its 0.35% expense ratio.
12-month yield: 3.2%
Fidelity MSCI Real Estate Index ETF (FREL)
Boston-based Fidelity Investments is one of the largest and most respected asset managers in the world. Fidelity is the company behind the $919 million ETF FREL.
This low-cost ETF has an expense ratio of just 0.08%. The fund is designed to track the performance of the MSCI USA IMI Real Estate 25/25 Index.
FREL invests in small-cap, mid-cap and large-cap domestic REITS on a modified cap-weighted basis. The fund holds more than 150 REITs that span all commercial real estate classes with retail, industrial and telecom being the most prominent.
The fund’s consistent, quarterly dividend, its broad-based diversification and high-quality, professional management are the main reasons to consider buying FREL now.
12-month yield: 3.7%
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7 Best REIT ETFs to Buy Now originally appeared on usnews.com
Update 06/24/24: This story was published at an earlier date and has been updated with new information.
