For equity investors who appreciate dividend income, the combination of real estate investment trusts — REITs for short — and exchange-traded funds — commonly called ETFs — is a perfect pairing. REIT ETFs offer superior dividend income and provide the opportunity for excellent capital appreciation over the long run.
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What Is a REIT?
REITs have been around since 1960. They were created by an act of Congress to encourage real estate development and allow small investors to benefit from commercial real estate investing.
REITs are highly specialized companies that invest exclusively in income-producing real estate. Equity REITs own and operate commercial property directly. Most equity REITs specialize in one real estate asset class such as apartment buildings, office space, health care facilities, retail space or digital infrastructure like data centers and cell phone tower sites.
Mortgage REITs, also called mREITs, own mortgages or mortgage bonds that confer an indirect equity interest in the underlying properties. A third kind of REIT, called a hybrid REIT, invests in both physical properties and financial instruments.
REITs avoid taxation at the corporate level by distributing at least 90% of taxable income to shareholders as regular dividends. They can make excellent income vehicles because they are not subject to the corporate income tax.
ETFs Defined
Most experienced investors are familiar with exchange-traded funds, or ETFs. An ETF is a very popular type of open-ended mutual fund — meaning shares are created and redeemed as bought or sold — that trades on stock exchanges the same way shares of common stock do.
ETFs can be actively managed or based on relevant indexes. They can hold stocks, bonds, commodities, cryptocurrencies, derivatives and almost any other liquid asset class an investor can think of. The bottom line is that ETFs offer a wide variety of investment styles covering a large number of sectors, securities, strategies and benchmarks, professional security selection, and broad diversification all with a reasonable cost structure.
Why Invest in REIT ETFs?
The number of individual REITs trading on the major U.S. stock exchanges is close to 200. Many of them would make excellent long-term investments, but it would be exceedingly difficult for a small investor to build a diversified portfolio of individual REITs. Most retail investors are not experts in commercial real estate and, in any case, there are just too many to choose from. Furthermore, a small investor would be limited to only a few REIT securities. Portfolio diversification would suffer as a result.
REIT ETFs are a great alternative to researching and buying individual REITs. ETFs are professionally managed or follow an established index. Because REIT ETFs often hold dozens or hundreds of individual issues, they offer exceptional diversification that would be almost impossible for a small investor to duplicate.
Of the more than 3,000 ETFs on the market, there are about 40 that specialize in REITs and real estate-related investing. The seven funds on this list are some of the best on the market:
| REIT ETF | Expense Ratio | Forward Dividend Yield* |
| Vanguard Real Estate Index Fund ETF Shares (ticker: VNQ) | 0.13% | 3.9% |
| iShares Cohen & Steers REIT ETF (ICF) | 0.33% | 2.7% |
| iShares Mortgage Real Estate Capped ETF (REM) | 0.48% | 9.6% |
| SPDR Dow Jones REIT ETF (RWR) | 0.25% | 3.8% |
| Invesco Active U.S. Real Estate Fund (PSR) | 0.35% | 3.1% |
| SPDR Dow Jones International Real Estate ETF (RWX) | 0.59% | 4.3% |
| Schwab U.S. REIT ETF (SCHH) | 0.07% | 3.2% |
*As of Jan. 8 close.
Vanguard Real Estate Index Fund ETF Shares (VNQ)
VNQ has net assets of over $60 billion, making it the largest REIT ETF on the market. This fund is managed to track the MSCI U.S. Investable Market Real Estate 20/50 Index. There are roughly 160 holdings in the fund at any given time.
VNQ was designed to be an accurate representation of the Global Industry Classification Standard real estate sector of the U.S. stock market. It holds large-cap, mid-cap and small-cap REITs, providing investors with broad diversification by all measures.
The fund guards against overconcentration by imposing strict position limits. No single stock can make up over 20% of the total asset weight, and the combined weight of stocks that make up more than 5% of the fund can not exceed 50% of the total weight of the fund.
Vanguard index funds are generally very cost-effective. VNQ is no exception. The fund has an expense ratio of 0.13%. After those expenses are accounted for, the fund should show very little tracking error. VNQ has a current yield of 3.9%.
iShares Cohen & Steers REIT ETF (ICF)
The New York-based asset manager Cohen & Steers is the undisputed leader in real estate indexing. It’s been almost exclusively concentrating on real estate — especially on publicly traded REITs — for close to 40 years. The company’s reputation in the real estate industry is second to none.
ICF is a REIT ETF with about $2 billion in net assets. The fund mirrors the Cohen & Steers Realty Majors Index. That benchmark, as its name implies, represents the performance of the U.S. large-cap REIT market. The focus is on well-known, well-run REITs with undeniable market presence and wide geographical reach.
ICF is the right fund for investors who want exposure to the most powerful and prominent REITs in each of the real estate classes they focus on.
The expense ratio comes in at 0.33%, and the current yield is 2.7%.
[READ: 7 Best Income ETFs to Buy in 2025]
iShares Mortgage Real Estate Capped ETF (REM)
REM is a $646 million REIT index ETF designed to duplicate the performance of the FTSE Nareit All Mortgage Capped Index after the fund’s 0.48% expense ratio is subtracted. The fund is designed to represent the entirety of the U.S. mREIT market.
REM buys and holds residential mortgage-backed securities, known as RMBS, and commercial mortgage-backed securities, called CMBS. CMBS and RMBS are bonds made up of hundreds of individual mortgages that were originally issued by commercial banks and subsequently collateralized and packaged into individual securities by Wall Street investment bankers.
Investors will notice that REM acts very similar to a bond fund. That’s because, in essence, that’s exactly what it is. The difference between this ETF and a traditional bond fund is that REM holds only real estate mortgage bonds, which are ultimately backed by real property.
Income investors will appreciate the fund’s current dividend yield of 9.6%.
SPDR Dow Jones REIT ETF (RWR)
RWR is a $1.8 billion fund that mirrors the Dow Jones U.S. Select REIT Capped Index. This ETF features an expense ratio of 0.25% and has a dividend yield of 3.8%.
The benchmark that underlies this fund is similar to the Dow Jones Equity All REIT Capped Index, but it includes both equity REITs and mREITs. As a result, this fund offers investors more diversification and broader exposure to the domestic REIT market.
RWR is suitable for investors seeking a single fund to represent the complete domestic REIT market. The fund excludes REITs that get an inordinate percentage of value from factors other than the market prices of the underlying real estate. In other words, RWR is designed to be close to a pure play on commercial real estate valuations in the U.S.
Invesco Active U.S. Real Estate Fund (PSR)
Unlike the previous ETFs on this list, PSR is actively managed rather than being based on an index. PSR is a relatively small fund with about $73 million in net assets.
One of the things that makes this fund unique is that it’s managed on a quantitative basis. The portfolio managers use sophisticated computer formulas and artificial intelligence-driven algorithms to help them choose which REITs to buy. The computer programs screen REITs that make up the FTSE Nareit All Equity Index and identify companies with the best risk-adjusted potential for sustainable income and superior capital appreciation.
There are close to 140 REITs in the index, but only about 30 become eligible for the PSR portfolio.
The expense ratio for this quant fund is 0.35%. It has a current dividend yield of 3.1%.
SPDR Dow Jones International Real Estate ETF (RWX)
More aggressive REIT ETF investors willing to invest globally should think about RWX. The fund tracks the performance of the Dow Jones Global ex-U.S. Select Real Estate Securities Index. That benchmark is a float-adjusted, cap-weighted index that’s representative of the commercial real estate market outside the U.S.
The fund has current net assets of just over $249 million. RWX investors should be prepared for a relatively high level of internal trading and turnover compared to more static domestic index funds. The expense ratio for RWX — currently 0.59% — is also higher than index ETF investors may be used to.
There are no mREITs or hybrid REITs in the portfolio. RWX invests exclusively in equity REITs.
The fund has a dividend yield of about 4.3%. Investors who understand the risks of global investing should give this fund serious consideration.
Schwab U.S. REIT ETF (SCHH)
SCHH is the right REIT ETF for investors looking for a solid, low-cost core real estate holding. The fund has assets of over $7 billion and a low expense ratio of just 0.07%.
SCHH is managed to track the performance of the Dow Jones Equity All REIT Capped Index. As such, it invests in every REIT that’s included in the Dow Jones U.S. Total Stock Market Index, which itself includes over 3,700 stocks.
The fund uses proprietary weighting methods that adjust holdings based on market cap, liquidity and public float. In this way, SCHH avoids owning too much of any one REIT.
There are about 120 holdings in the SCHH portfolio. Investors who own this fund will enjoy ample diversification.
SCHH has a current dividend yield of about 3.2%.
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7 Best REIT ETFs to Buy for 2025 originally appeared on usnews.com
Update 01/09/25: This story was published at an earlier date and has been updated with new information.
