Real estate investment trusts, commonly called REITs, can be an excellent asset class for investors who want dependable current income but don’t want to sacrifice the potential for capital appreciation. One of the best ways to invest in REITs is through exchange-traded funds, or ETFs, that specialize in REIT investing.
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Congress created REITs in 1960 to encourage domestic real estate development and to make commercial real estate investing more accessible to the investing public. To facilitate these goals, REITs were developed with a built-in tax advantage. Companies organized as REITs can avoid corporate taxation by distributing at least 90% of their taxable income back to investors. For publicly traded REITs, income distribution takes the form of dividends paid regularly to shareholders.
The first retail ETF was launched in 1993. At the time, it was called the Standard & Poors Depository Receipt. It’s known today as SPDR S&P 500 Trust (ticker: SPY), and, with around $600 billion in assets, it is one of the most popular ETFs in the world. Over the ensuing years, the ETF universe has grown to include more than 3,200 funds that invest in a wide range of asset classes and investment sectors, such as income-producing real estate.
There are about 225 REITs that trade on U.S. stock markets. Most specialize in just one class of real estate. Examples include retail property, multifamily residential property, office space and industrial space. The number and variety of REITs can make building a real estate stock portfolio challenging. That’s where REIT ETFs come in.
REIT ETFs provide investors with a simple, cost-effective way to invest in commercial real estate. Every REIT ETF has a professional manager who uses their industry expertise to select REITs to achieve the objectives of the fund. Many track established REIT indexes that serve as benchmarks for a class of real estate or the broad REIT market. A single REIT ETF can hold dozens or even hundreds of individual REITs, making it easy for retail investors to achieve an appropriate level of diversification.
If you see the income and growth potential of REITS and appreciate the benefits and convenience of ETFs, here is a list of REIT ETFs to consider buying today:
| REIT ETF | Expense Ratio | Forward Dividend Yield* |
| Vanguard Real Estate ETF (VNQ) | 0.12% | 3.7% |
| iShares Cohen & Steers REIT ETF (ICF) | 0.33% | 2.5% |
| Invesco Active U.S. Real Estate Fund (PSR) | 0.35% | 2.8% |
| Schwab U.S. REIT ETF (SCHH) | 0.07% | 2.9% |
| SPDR Dow Jones REIT ETF (RWR) | 0.25% | 3.3% |
| iShares Mortgage Real Estate Capped ETF (REM) | 0.48% | 9.1% |
| iShares Global REIT ETF (REET) | 0.14% | 3.9% |
*As of Oct. 29 market close.
Vanguard Real Estate ETF (VNQ)
With net assets topping $71 billion, VNQ is the largest of the roughly 40 ETFs in the real estate category. The objective of VNQ is to replicate the performance of the MSCI US Investable Market Real Estate 25/50 Index.
The fund includes large-, mid- and small-cap REITs. It’s designed to reflect the U.S. real estate sector. VNQ primarily invests in equity REITs that own and manage real property directly. The fund avoids mortgage REITs, or mREITs, that invest in real estate indirectly by owning commercial or residential mortgages or mortgage-backed bonds.
VNQ currently holds 154 individual REITs, making it a good choice for income-oriented investors who want to diversify their portfolios against the risks associated with more traditional stocks and bonds.
The fund has an expense ratio of 0.13% and currently yields 3.7%.
iShares Cohen & Steers REIT ETF (ICF)
Cohen & Steers is a New York-based asset management firm that has specialized in real estate since its founding in 1986. It was one of the first companies to concentrate on publicly traded REITs. Cohen & Steers research is highly regarded in the real estate investment industry.
ICF is a $2.3 billion ETF designed to track the Cohen & Steers Realty Majors Index. In conjunction with its benchmark, the fund seeks to represent the performance of large-cap, U.S.-traded REITs. As the name of the index implies, it focuses on leading firms with substantial reach and a large market presence.
ICF is the right fund for investors looking to invest in prominent REITs that dominate the sectors they specialize in.
The fund’s expense ratio is 0.33%. ICF has a current yield of 2.5%.
Invesco Active U.S. Real Estate Fund (PSR)
PSR is a $69 million, actively managed ETF that takes a quantitative approach to REIT investing. The fund’s managers use specially designed computer algorithms powered in part by artificial intelligence (AI) technology.
The software and technological screens employed by the portfolio managers at PSR are designed to identify REITs within the FTSE Nareit All Equity Index that have the best risk-adjusted potential for income and growth. Of the 137 REITs that comprise the index, only about 30 pass the eligibility screens to be included in PSR.
The fund screens the REITs in the index more or less constantly and will add or drop REITs to maintain portfolio criteria. Investors who own PSR should expect a high degree of internal trading and substantial portfolio turnover.
The expense ratio for PSR comes in at 0.35%. The current yield is 2.8%.
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Schwab U.S. REIT ETF (SCHH)
SCHH is a low-cost, $8 billion REIT ETF suitable for investors looking for a core holding in the commercial real estate sector.
The fund is designed to mirror the Dow Jones Equity All REIT Capped Index. It invests in all of the publicly traded equity REITs that are part of the larger Dow Jones U.S. Total Stock Market Index.
The fund uses unique weighting methods that adjust holdings for market capitalization, liquidity and public float. This guards against overconcentration risk and keeps individual REITs from having too much of an influence on the performance.
There are 120 REITs in the portfolio, ensuring a high degree of diversification. Currently, the top three holdings in the fund are Prologis Inc. (PLD), representing 8.1% of the fund’s assets, American Tower Corp. (AMT), comprising about 7.5% of assets and Equinix Inc. (EQIX), which makes up 5.8% of the fund.
SCHH currently yields 2.9%. The fund boasts a low expense ratio of just 0.07%.
SPDR Dow Jones REIT ETF (RWR)
This $1.8 billion REIT ETF is based on the Dow Jones U.S. Select REIT Capped Index. The fund features an expense ratio of 0.25% and has a current yield of 3.3%.
The fund’s benchmark index differs from the Dow Jones Equity All REIT Capped Index mentioned above by featuring both equity REITs and mREITs. In tracking this index, RWR provides broad exposure to the entirety of the domestic REIT market.
As such, this fund is appropriate for investors looking for a single security that can act as a proxy for the U.S. commercial real estate industry. RWR purposefully excludes stocks that derive an inordinate amount of their value from factors other than real estate valuation. The goal of the fund is — to the extent possible — to be a pure play on real estate.
RWR is a cap-weighted fund that is adjusted to account for public float, meaning that larger, more liquid REITs have a greater influence on the fund’s performance.
iShares Mortgage Real Estate Capped ETF (REM)
REM is the only mREIT ETF that appears on this list. The fund tracks the FTSE Nareit All Mortgage Capped Index, which was designed to reflect the overall performance of mREITs that trade on U.S. markets.
The fund does not originate or hold individual mortgages. Instead, REM invests in commercial and residential mortgage-backed bonds, commonly referred to as CMBS and RMBS. They represent pools of either commercial or residential mortgages originally issued by regional or commercial banks and sold to Wall Street where they were securitized and turned into bonds for resale.
By its nature, REM shares many of the characteristics associated with bond funds. In other words, REM tends to be more sensitive to movements in interest rates than equity REITs. This may be a benefit as rates drop but can be detrimental when rates are rising.
The fund has assets of $672 million and features a current yield of 9.1%.
iShares Global REIT ETF (REET)
REIT ETF investors who understand the risks associated with global investing and can afford to be more aggressive may want to consider REET.
REET is a $4 billion fund that invests internationally by tracking the FTSE EPRA Nareit Global REITs Total Return Index. The fund invests in REITs and real estate stocks from all over the world, including countries classified as emerging markets. Global investing can improve a portfolio’s diversification profile but can add to volatility and hurt performance during bear markets or in times of geopolitical instability.
REET is not a strict replication index fund. Still, at least 80% of the fund’s assets are invested in stocks that comprise the index, and the entire portfolio is designed to closely match the benchmark’s performance — minus the 0.14% expense ratio.
The fund emphasizes income production. That fact is reflected in its current yield of 3.9%.
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7 REIT ETFs to Buy in 2025 originally appeared on usnews.com
Update 10/30/24: This story was published at an earlier date and has been updated with new information.
