Current income is an important aspect of investing and a legitimate financial objective. Some investors — particularly retired folks — depend greatly on the interest and dividend income their holdings generate. Others appreciate income-producing investments because they understand that regular income can enhance a portfolio’s total return and smooth out market volatility. Still, directing a portfolio too much toward income can limit growth opportunities.
With that in mind, many investors instead choose to seek the right balance between income and capital appreciation potential.
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Real estate investment trusts, or REITs, offer investors both. When investors gain REIT exposure through exchange-traded funds (ETFs) they get comprehensive diversification and professional management in a single, cost-effective security that can be bought and sold as easily as any stock.
A REIT is a specialized company that puts its investor’s capital to work in income-producing real estate. Equity REITs own and operate properties directly. Some buy existing commercial properties, others develop land and build buildings from the ground up in addition to acquiring them on the market. Another type of REIT called a mortgage REIT, or mREIT, buys and holds real estate-related financial instruments such as bonds or mortgages rather than holding property directly.
Equity REITs make money by collecting rent, while mREITs generate earnings by collecting interest. A REIT that owns both property and financial instruments is called a hybrid REIT. All REITs are required by law to distribute a minimum of 90% of taxable income back to shareholders in the form of a regular dividend, and in exchange they don’t have to pay corporate taxes, so investors avoid the double taxation that comes along with normal dividends.
ETFs have been available to retail investors since 1993. An ETF is a unique kind of open-ended mutual fund that trades throughout the day like a stock whenever the markets are open. Investors appreciate the real-time pricing, enhanced flexibility and liquidity of ETFs compared to traditional open-ended mutual funds which are priced only once a day at the close of trading. ETFs provide instant security selection and can achieve levels of diversification that are out of the reach of the small investor.
REIT ETFs are an excellent way for investors to gain exposure to the real estate sector. Actively managed REIT ETFs feature expert portfolio managers with vast experience in real estate investing while passively managed index ETFs track the performance of established real estate industry benchmarks. All of them offer superior diversification in a cost-effective, convenient package.
The benefits of REIT ETF investing start with dependable dividend income but also include the very real possibility for long-term capital appreciation. The seven REITs on this list are a great place to begin your research into this dynamic asset class:
REIT ETF | Expense Ratio | 30-day SEC yield* |
Vanguard Real Estate Index Fund ETF Shares (ticker: VNQ) | 0.13% | 3.5% |
Schwab U.S. REIT ETF (SCHH) | 0.07% | 3.9% |
iShares Mortgage Real Estate Capped ETF (REM) | 0.48% | 9.7% |
JPMorgan Realty Income ETF (JPRE) | 0.50% | 3.0% |
iShares Residential and Multisector Real Estate ETF (REZ) | 0.48% | 2.6% |
Dimensional Global Real Estate ETF (DFGR) | 0.22% | 3.7%** |
JPMorgan BetaBuilders MSCI U.S. REIT ETF (BBRE) | 0.11% | 3.8% |
*As of Feb. 4 close.**12-month trailing dividend yield is listed for DFGR.
Vanguard Real Estate Index Fund ETF Shares (VNQ)
Of the roughly 40 ETFs in the real estate category, VNQ is the largest. The fund manages more than $34 billion in net assets. VNQ is managed to replicate the performance of the MSCI US Investable Market Real Estate 25/50 Index. The objective of that benchmark is to be a reflection of the real estate sector of the stock market.
Investors will find large-, mid- and small-cap REITs inside the VNQ portfolio, but they won’t find any mREITs. This fund invests exclusively in equity REITs. There are currently about 150 holdings in the fund, meaning VNQ offers a superior diversification profile.
This popular REIT ETF is suitable for investors looking for a full replication index fund with a relatively high level of dividend income and moderate capital appreciation over the long term.
Cost-conscious investors will appreciate the fund’s low 0.13% expense ratio and low internal turnover. VNQ has a 30-day SEC yield of 3.5%.
Schwab U.S. REIT ETF (SCHH)
The next REIT ETF on the list is the low-cost, $7 billion fund, SCHH. This fund would make an excellent core commercial real estate holding in any portfolio.
The fund tracks the Dow Jones Equity All REIT Capped Index. It holds virtually all of the publicly traded equity REITs that appear in the broad market, Dow Jones U.S. Total Stock Market Index. SCHH employs an adjusted-cap-weight methodology. That means that the fund is primarily cap-weighted but adjustments are made based on liquidity and the size of the public float. The purpose of these adjustments is to keep any large REIT from having too much influence on the overall performance of the fund.
There are currently about 120 individual REITs in the fund’s portfolio. This should give investors all the diversification they need. The fund has a low expense ratio of just 0.07% and a 30-day SEC yield of 3.9%.
iShares Mortgage Real Estate Capped ETF (REM)
When building a portfolio, REIT ETF investors shouldn’t neglect mREITs. REM is a $600 million fund that tracks the FTSE Nareit All Mortgage Capped Index. The fund was designed to give investors broad exposure to the publicly traded mREIT universe.
REM holds REITs that invest in both commercial mortgage-backed securities, called CMBS, and residential mortgage-backed securities, called RMBS. Those unique securities are types of mortgage bonds that are themselves made up of large pools of individual mortgages. The original mortgages were underwritten by regional banks and subsequently sold to Wall Street to be collateralized and turned into investable bonds.
REM is a REIT fund but, by the nature of stocks it holds, it will behave very much like a bond fund. In other words, this fund will be quite sensitive to the prevailing interest rate environment. When rates are falling the fund will tend to perform better than when rates are rising.
The fund has an expense ratio of 0.48% and a 30-day SEC yield of 9.7%.
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JPMorgan Realty Income ETF (JPRE)
JPRE is an actively managed, $400 million ETF that seeks to deliver a high total return by investing in REITs and real estate stocks that offer a high current income and excellent growth prospects.
The fund is managed by 31-year industry vet Scott Blasdell. Mr. Blasdell has been with J.P. Morgan for 26 years. The fund is not restricted to one market capitalization. Instead, JPRE invests in REITs of all sizes. The fund’s universe of investable stocks includes the entirety of the real estate sector. JPRE screens the whole sector looking for companies with solid financials, growing revenues and excellent growth potential.
Stock selection is driven by in-depth analysis and painstaking research. This fund won’t buy a REIT unless the price it pays fully reflects its long-term value prospects. The fund’s strict criteria means that, right now, there are only 34 holdings in the portfolio.
JPRE has a net expense ratio of 0.50%, which is in line with other actively managed funds in the category. The 30-day SEC yield for JPRE is 3%.
iShares Residential and Multisector Real Estate ETF (REZ)
REZ is an $800 million index ETF that tracks the performance of the FTSE Nareit All Residential Capped Index. Investors should not, however, be misled by the name of the fund’s benchmark. Although this fund invests primarily in residential REITs, it owns companies that specialize in other classes of real estate as well. Specifically the fund holds U.S. residential REITs, health care REITs and self-storage REITs.
This is not a broad-based fund. REZ is appropriate for investors who want targeted exposure to residential, health care and self-storage real estate. There are currently 39 holdings in the REZ portfolio.
The fund’s largest holding is the health care facilities REIT Welltower Inc. (WELL) which represents close to 18% of assets. The self-storage REITs Public Storage (PSA) and Extra Space Storage Inc. (EXR) combine to make up over 16% of assets. About 6.4% of the fund is invested in AvalonBay Communities Inc. (AVB), the $31 billion residential REIT.
REZ has an expense ratio of 0.48%. The fund’s 30-day SEC yield is 2.6%.
Dimensional Global Real Estate ETF (DFGR)
DFGR is a REIT ETF with a particular focus on capital appreciation. That’s not to say that the portfolio managers neglect or disregard income considerations, but it does mean that this fund is for investors who prioritize growth over income.
DFGR is a global fund, meaning that it is not limited to domestic REITs. This fund looks for quality real estate stock opportunities internationally, including in developing- and emerging-market countries. It invests in companies of all sizes. Potential investors should think of DFGR as a fairly aggressive investment with the potential for high volatility.
The fund has net assets of more than $2 billion, which speaks well of a REIT fund that downplays income and invests so aggressively. The expense ratio comes in at 0.22% and the 12-month trailing dividend yield sits at 3.7%.
JPMorgan BetaBuilders MSCI U.S. REIT ETF (BBRE)
The objective of BBRE is to replicate the performance of the MSCI US REIT Custom Capped Index after the fund’s expense ratio of 0.11% is subtracted.
The benchmark comprises real estate sector stocks from the MSCI USA Investable Market Index. The number of holdings can change as the index changes, but the fund currently holds 119 individual REITs.
The fund is generally market-cap weighted, but the influence of larger REITs is capped in an effort to create a more diversified portfolio compared a strictly cap-weighted fund. The portfolio managers hope this reduces overall risk.
BBRE is a good-sized fund with around $910 million in net assets. This REIT ETF has a 30-day SEC yield of 3.8%.
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7 Best REIT ETFs to Buy for 2025 originally appeared on usnews.com
Update 02/05/25: This story was previously published at an earlier date and has been updated with new information.