Real estate investment trusts, commonly known as REITs, can be an ideal investment for investors looking for dependable dividend income and the potential for substantial capital appreciation over time. One of the best ways to own REITs is through exchange-traded funds (ETFs) that specialize in commercial real estate investing.
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What Is a REIT?
REITs are specialty investment companies that invest shareholder capital in real estate or real estate-backed financial instruments. REITs were created by Congress and signed into law by President Dwight Eisenhower in 1960 to encourage real estate development nationwide and to give all investors access to the benefits of owning rental property.
Firms that are incorporated as REITs can avoid paying corporate income taxes if they distribute a minimum of 90% of their taxable income back to investors. REITs avoid the double taxation that most corporations experience and are often able to distribute a substantially higher income to shareholders.
REITs can be private companies or can be publicly traded. Shares of REITs are sometimes called units, but regardless how investors refer to them, they trade on all the major stocks exchanges just like shares of common stock. A REIT that owns real estate directly is called an equity REIT. REITs that own real estate financial instruments such as mortgages or mortgage-backed bonds are called mortgage REITs, or mREITs. Some REITs have direct ownership in real estate and own mortgage paper. These are called hybrid REITs.
Why Choose REIT ETFs?
ETFs are a very popular asset class. They are very convenient and, given all their benefits, have a reasonable cost structure. There are ETFs that specialize in almost all commercial sectors and in all types of securities. This, of course, includes commercial real estate.
Buying and holding REIT ETFs rather than individual REITs can be very beneficial to retail and institutional investors. A REIT ETF can own anywhere from a dozen to several hundred REITs. This provides investors with a level of diversification that would be very difficult, if not impossible, to achieve otherwise. Further, most REITs are managed by experts in the commercial real estate industry or are based on popular, broad-based REIT indexes. The professional management REIT ETFs offer is very valuable, especially to the retail investor who may not have time to research the large universe of REITs on the market.
And, considering what you get for your money, REIT ETFs — especially index funds — can be extremely cost effective.
What Are the Best REIT ETFs to Buy Now?
Because REITs have some similar attributes to fixed-income securities, REIT ETFs often appreciate when interest rates decline. This should be of particular interest to investors right now, because, after a prolonged period of rate increases, interest rates finally seem poised to fall.
The following list of the best seven REIT ETFs to own for the rest of 2024 includes funds, index funds and actively managed funds. It covers all market capitalizations and features an international ETF. All the different classes of real estate are represented, and the list puts an emphasis on cost efficiency. Chances are good that one or more of the ETFs on this list will fit nicely into your personal portfolio:
| REIT ETF | Expense Ratio | Trailing-12-month Yield* |
| Schwab U.S. REIT ETF (ticker: SCHH) | 0.07% | 3.1% |
| Invesco Active U.S. Real Estate Fund (PSR) | 0.35% | 3.0% |
| The Real Estate Select Sector SPDR Fund (XLRE) | 0.09% | 3.3% |
| Fidelity MSCI Real Estate Index ETF (FREL) | 0.08% | 3.4% |
| iShares Mortgage Real Estate Capped ETF (REM) | 0.48% | 9.2% |
| iShares Core U.S. REIT ETF (USRT) | 0.08% | 3% |
| SPDR Dow Jones International Real Estate ETF (RWX) | 0.59% | 3.5% |
*As of Sept. 3 close.
Schwab U.S. REIT ETF (SCHH)
SCHH is a good sized REIT ETF with net assets of $7.3 billion. This fund appears first on this list because of its direct approach to real estate investing and its low expense ratio. SCHH makes an excellent core real estate holding.
The fund is based on the Dow Jones Equity All REIT Capped Index. It’s very well diversified on both a geographic basis and from a real estate class standpoint.
Currently the fund’s largest holding is Prologis Inc. (PLD). That logistics REIT represents close to 9% of the fund’s assets but, considering there are 119 holdings in the portfolio, does not present a concentration risk.
The expense ratio of SCHH is only 0.07%. This means investors can expect a lower tracking error and a higher total return than more expensive REIT funds.
Trailing-12-month yield: 3.1%
Invesco Active U.S. Real Estate Fund (PSR)
PSR is an actively managed, quantitative ETF with assets under management of a little over $64 million. This fund uses innovative, high-tech methods to help the portfolio managers at Invesco select the REITs that will be included in the fund. PSR employs artificial intelligence (AI)-driven, highly sophisticated algorithms to identify REITs that have an excellent risk-adjusted potential for dependable income and offer the possibility for high, long-term capital appreciation. The algorithms are programed based on an intensive statistical and historical model that was developed by real estate investing experts and talented software engineers.
PSR draws from the FTSE Nareit All Equity Index to compile its universe of REITs. It subjects the REITs in that index to constant computerized scrutiny and includes only the very best in the portfolio.
Because this fund is actively managed and technology driven, investors shouldn’t be surprised by its 0.35% expense ratio.
Trailing-12-month yield: 3.0%
[READ: 8 Top-Rated Income Funds to Buy in 2024]
The Real Estate Select Sector SPDR Fund (XLRE)
The S&P 500 is a stock market benchmark that no investor can afford to ignore, even when investing in REIT ETFs. That’s precisely the rationale behind owning XLRE.
XLRE is a popular SPDR ETF with a healthy $7.7 billion in assets. The fund is designed to replicate the performance of the S&P Real Estate Sector Index after the low expense ratio of 0.09% is subtracted.
All the REITs in the portfolio are components of the S&P 500. This fund is perfect for investors who are comfortable and familiar with that large-cap index but are looking to make a tactical allocation to the commercial real estate sector.
Like the previous two ETFs on this list, XLRE invests exclusively in equity REITs. Most of the companies in the portfolio have a specific focus on development and property management.
Trailing-12-month yield: 3.3%
Fidelity MSCI Real Estate Index ETF (FREL)
With an expense ratio of just 0.08%, FREL qualifies as a low-cost ETF, but because the fund is managed by Fidelity Investments — one of the most respected fund managers in the world — investors can be assured that they are getting a well-managed high-quality fund.
FREL has assets of just over $991 million and was created to track the MSCI USA IMI Real Estate 25/25 Index.
FREL owns REITs in the large-cap, mid-cap and small-cap range of market capitalization but, with some modifications, it is cap weighted, meaning investors can expect bigger REITs to influence performance more than smaller ones.
Also, with more than 150 holdings that cover all real estate classes — especially telecom, industrial and retail — FREL offers excellent diversification as well.
Trailing-12-month yield: 3.4%
iShares Mortgage Real Estate Capped ETF (REM)
REM is the first and only mREIT ETF on this list. This ETF tracks the FTSE Nareit All Mortgage Capped Index. That benchmark is a flagship index in the mREIT industry and was designed to reflect the general performance of all mREITs that trade on major U.S. stock exchanges.
The fund owns REITs that specialize in both commercial and residential mortgage-backed securities, or MBS. As such, it’s an excellent choice for investors who want exposure to the entire range of real estate finance.
Because REM holds fixed-income securities it may perform better than other REITs when rates begin to drop.
Currently, the fund’s No. 1 holding is Annaly Capital Management REIT Inc. (NLY). That $10 billion residential mREIT represents over 15% of assets.
REM has an expense ratio of 0.48% which is higher than the other funds on this list but is offset by the fund’s exceptional dividend yield.
Trailing-12-month yield: 9.2%
iShares Core U.S. REIT ETF (USRT)
Investors looking for an inexpensive, broad-based REIT ETF should consider USRT.
This $2.8 billion index ETF is based on the FTSE Nareit Equity REIT index which is considered a good representation of publicly traded REITs. The fund has an internal expense ratio of 0.08% which means investors will experience minimal tracking error.
The iShares family of ETFs is owned and operated by BlackRock Inc. (BLK), one of the largest asset managers in the world. Investors can and should expect a high degree of quality and professionalism from this fund.
The fund reported a one-year total return of 7.75% based on market price as of June 30. Market watchers are anticipating even better returns in the coming falling rate environment.
Trailing-12-month yield: 3%
SPDR Dow Jones International Real Estate ETF (RWX)
Real estate is big business; not just in the U.S. but around the world. Income-focused investors who can accept the risks of global investing will want to take a close look at RWX.
RWX has assets of around $290 million. The objective of the fund is to follow the Dow Jones Global ex-US Select Real Estate Securities Index. After the 0.59% expense ratio is accounted for, the fund will come very close to matching the performance of the benchmark.
The fund differentiates itself from its peers by using a float-adjusted cap weighting. This means that, in addition to market cap, it takes a security’s liquidity and the size of its public float into account when allocating resources. Consequently, larger, more actively traded REITs with more shares in the float are given more precedence in the portfolio.
Investors considering RWX should be aware that international investing involves a higher degree of risk and a higher level of volatility.
Trailing-12-month yield: 3.5%
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7 Best REIT ETFs to Buy for 2024 originally appeared on usnews.com
Update 09/04/24: This story was published at an earlier date and has been updated with new information.
