Real estate investment trusts, better known as REITs, are a popular asset class among investors looking for superior dividend income and excellent growth potential. REITs are unique companies that own and operate commercial real estate or, alternatively, financial instruments like commercial real estate mortgages or mortgage bonds that are backed by commercial real estate.
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Types of REITs
Some REITs own commercial buildings directly. These are called equity REITs. They earn money by collecting rent on the property they own. Another type of REIT is called a mortgage REIT, or mREIT. Mortgage REITs earn their money by collecting interest income on the debt instruments they hold.
REITs that hold both real property and financial instruments are called hybrid REITs.
An important point about all REITs is that they are required by law to distribute most of their after-tax income — a minimum of 90% — to shareholders as dividends.
REIT ETFs
REIT exchange-traded funds, or ETFs as they are more commonly called, are securities that trade on stock exchanges the same way stocks do. The portfolio managers of REIT ETFs invest in publicly traded REITs. Given that REIT ETFs can own many individual REITs that themselves might own several types of income-producing real estate, REIT ETFs offer shareholders a greatly enhanced level of diversification plus the important benefit of professional portfolio management.
Here’s a timely list featuring seven of the best REIT ETFs available today. If you’re looking for high, reliable income and the potential for substantial capital appreciation, one or more of these ETFs could be right for you:
| REIT ETF | Dividend Yield* |
| Vanguard Real Estate ETF (ticker: VNQ) | 4.3% |
| SPDR Dow Jones International Real Estate ETF (RWX) | 3.7% |
| Dimensional Global Real Estate ETF (DFGR) | 3.1% |
| IQ CBRE NextGen Real Estate ETF (ROOF) | 3.0% |
| VanEck Mortgage REIT Income ETF (MORT) | 11.3% |
| Invesco KBW Premium Yield Equity REIT ETF (KBWY) | 8.6% |
| Virdent U.S. Diversified Real Estate ETF (PPTY) | 3.7% |
*As of Aug. 1 close.
Vanguard Real Estate ETF (VNQ)
VNQ is an index ETF with a healthy market cap of $62 billion. The fund is designed to follow the MSCI U.S. Investable Market Real Estate 25/50 Index. The index has about 160 holdings, all of which are publicly traded U.S.-based REITs that are robustly traded on major exchanges. VNQ is in the Vanguard Equity Index Group family of funds. Vanguard is, of course, an asset manager well known for its lineup of top-quality, low-cost index mutual funds and ETFs. In keeping with Vanguard’s pricing philosophy, VNQ has a low expense ratio of 0.13%. Investors can have confidence that this fund will have a minimal tracking error.
A big chunk of the fund’s assets — about 20% — are invested in high-tech REITs that own communication towers, server farms and data centers. With the ongoing rollout of 5G communications and the incredible growth of artificial intelligence, or AI, technology, the demand for those types of properties has never been greater. In other words, VNQ is a very timely investment.
Trailing yield: 4.3%
SPDR Dow Jones International Real Estate ETF (RWX)
Investors looking for exposure to REITs based outside of the U.S. should consider RWX.
RWX is based on the Dow Jones Global ex-U.S. Select Real Estate Securities Index. That unique index is a float-adjusted market-cap-weighted benchmark that is designed to reflect the performance of commercial real estate around the world, not including America.
Be aware that RWX might have a higher internal turnover than other index REIT ETFs do. That’s because the holdings in the index are reviewed every three months and the portfolio managers make frequent adjustments.
Don’t look for mortgage mREITs or hybrid REITS in the portfolio. RWX invests only in equity REITs.
One word of caution for investors looking at RWX. Because this is an international fund, RWX is probably not suitable for more conservative investors. That said, investors who want global exposure and who are aware of the risks of global investing, would be smart to consider this high-quality $265 million ETF in the SPDR family of funds.
Trailing yield: 3.7%
Dimensional Global Real Estate ETF (DFGR)
The primary objective of DFGR is capital appreciation, but income investors have no reason to avoid this fund. DFGR does not ignore income considerations. The fund just wants investors to know that growth is its most important goal.
Another thing that makes DFGR different is that it is not limited to U.S.-based REITs. This ETF seeks good quality income properties from around the globe, including developing and emerging-market countries. The global nature of the fund may enhance growth potential, but investors should understand that DFGR is an aggressive investment with the possibility of high volatility. Keep in mind also that DFGR will invest in small-cap REITs as well as larger ones.
DFGR is a specialized REIT ETF, but it is not a small one. This fund has an impressive $1.8 billion in assets under management. The fund’s expense ratio is 0.22%. That number is surprisingly low for a global ETF with a relatively high internal turnover.
Trailing yield: 3.1%
[READ: The 10 Top Picks of 10 Billionaire Stock Portfolios]
IQ CBRE NextGen Real Estate ETF (ROOF)
ROOF is an index ETF that mirrors the proprietary index called the IQ CBRE NextGen Real Estate Index. The objective of this REIT ETF is to profit from real estate that’s related to high-tech industries. Specifically, data centers, mobile phone towers, server farms, call centers and e-commerce. No one can doubt the tremendous demand for properties of this type.
This is not a strictly large-cap fund. ROOF will invest in REITs of all market capitalizations, meaning the fund does have several small-cap and mid-cap companies in its portfolio. Investors can be assured, however, that ROOF will only buy developed market companies. In other words, ROOF is appropriate for investors who want to own next-generation commercial real estate and understand the unique risk profile of this fairly aggressive REIT ETF.
Incidentally, ROOF had a name change in the recent past. The fund used to be called The IQ U.S. Real Estate Small Cap ETF. But there should be no confusion: The symbol and the investment objective of this $142 million ETF have not changed.
Trailing yield: 3%
VanEck Mortgage REIT Income ETF (MORT)
No portfolio of REIT ETFs can be considered complete if it does not include at least one mREIT. Mortgage REITs are different from equity REITs. They don’t own commercial real estate directly. Rather, mREITs buy and hold financial obligations that are backed by real estate. These will include individual mortgages, collateralized mortgage bonds issued by government housing agencies and other debt instruments. Many mREITs even originate and service mortgages themselves.
MORT is an mREIT based on the MVIS US Mortgage REITs Index, which is a very popular benchmark in the real estate sector. MORT looks to duplicate the performance of that index as closely as possible. Shareholders can reasonably expect MORT to match the performance of the index, less its expense ratio of 0.43%.
MORT is a good-sized ETF with $275 million in assets that offers investors a superior and dependable dividend yield. Keep in mind, however, that the high yield means the fund can be exceptionally sensitive to the interest rate market. When rates go up, this fund will go down in response. On the other hand, when rates fall, this fund can appreciate quickly.
Trailing yield: 11.3%
Invesco KBW Premium Yield Equity REIT ETF (KBWY)
KBWY should be looked at by potential investors as primarily an income play. Simply stated, the main objective of this REIT ETF is to distribute a consistently high current income to its investors.
The fund mirrors the KBW Nasdaq Premium Yield Equity REIT. The index is different from most REIT indexes. It is dividend-yield-weighted rather than cap-weighted or equal-weighted. What this means to shareholders is that it focuses on REITs with superior dividend yields and places greater emphasis, or allocation weighting, on REITs that have the highest yields.
This inevitably results in an excellent dividend income. Another thing to consider is that this fund pays dividends monthly instead of quarterly (the way the majority of REIT ETFs do).
This $193 million fund invests in Nasdaq-traded small- and mid-cap real estate firms. Investors can expect higher risk and increased volatility compared to large-cap REIT ETFs. But, with that extra risk comes an extra reward in the form of an exceptional monthly income.
Trailing yield: 8.6%
Virdent U.S. Diversified Real Estate ETF (PPTY)
Virdent is a fund manager that invests based on sound market and company fundamentals. It bases its approach on principles-based investment strategies, which have been the foundation of its stock selection process since its family of ETFs was launched in 2013.
Right now there are 94 REIT holdings inside PPTY. The number of holdings will rarely go over 100, and they all undergo a rigorous vetting process. The management team at Virdent knows that successful real estate investing depends on four key factors: location, property type, debt levels and quality of management. They buy and hold only what they consider to be the best companies in those four areas.
PPTY will always be well diversified among commercial property types. It only holds REITs with manageable debt levels, and it looks for REITs with highly skilled and experienced managers and executives.
PPTY is a small fund with only about $126 million in assets, but investors shouldn’t shun this investment because of its size. According to the fund’s fact sheet, PPTY had a total return of 9.3% by net asset value for the one-year period ended June 30.
Trailing yield: 3.7%
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7 Best REIT ETFs to Buy Now originally appeared on usnews.com
Update 08/02/24: This story was published at an earlier date and has been updated with new information.
