Seasoned investors understand the diversification benefits of real estate investment trusts, or REITs, but often overlook the tax consequences.
REITs are required to distribute at least 90% of taxable income to shareholders as dividends. That’s a boon for anyone seeking income. However, where you hold these investments matters.
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REITs aren’t a pure diversifier in the way that even Treasurys are; listed REITs are equity-like with a real-estate tilt and interest-rate sensitivity. That means investors could consider using REITs for growth and income, but rely on high-quality bonds as an asset with low correlation for those times when stocks wobble.
Where to Hold REITs
It’s important to consider asset location in addition to asset allocation. That means placing each investment in the right account to boost after-tax returns.
Where you hold REITs matters, because their earnings are not taxed at the corporate level. All those dividends paid out to shareholders? The REIT can deduct those from their taxable income, effectively eliminating or significantly reducing their corporate-level tax burden.
How REITs Are Taxed
Because a REIT passes its income through to investors, the tax responsibility shifts to the shareholders. The majority are taxed at ordinary income rates, although REITs also pass along capital gains when they sell a property.
What does that mean for you?
Talk to your financial advisor or tax preparer for more specifics, but it often means locating REITs in a tax-advantaged account, such as an individual retirement account. An investment that kicks out ordinary income on a regular basis could mean significant hits in a taxable account.
With that in mind, here’s a look at seven of the largest REIT exchange-traded funds and how they might fit into a portfolio. There are some nuances, but in general, REIT ETFs are frequently well placed in tax-advantaged accounts.
| REIT | TTM Yield* | Expense Ratio |
| Vanguard Real Estate Index Fund ETF Shares (ticker: VNQ) | 3.9% | 0.13% |
| Schwab U.S. REIT ETF (SCHH) | 3.0% | 0.07% |
| Real Estate Select Sector SPDR Fund (XLRE) | 3.3% | 0.08% |
| iShares U.S. Real Estate ETF (IYR) | 2.3% | 0.39% |
| iShares Core U.S. REIT ETF (USRT) | 2.6% | 0.08% |
| iShares Select U.S. REIT ETF (ICF) | 2.5% | 0.32% |
| SPDR Dow Jones REIT ETF (RWR) | 3.9% | 0.25% |
*Trailing-12-month yield.
Vanguard Real Estate Index Fund ETF Shares (VNQ)
With $34.5 billion in assets under management, VNQ is the largest REIT ETF. It tracks 154 U.S. equity REITs, listing its holdings as companies that own “office buildings, hotels and other real property.”
“Because VNQ has a large-cap tilt, it offers relative stability versus smaller, more rate-levered names,” says Dean Lyulkin, CEO of small business lender Cardiff and owner of registered investment advisory The Dean’s List, both in San Diego.
“In our view, VNQ is well placed as a core REIT anchor for retirement-focused portfolios, even if it is a tad over-diversified,” he says.
As interest rates decline, Lyulkin says, “It may not soar as sharply in the early rate cuts, but it should deliver solid upside with less downside risk.”
Schwab U.S. REIT ETF (SCHH)
This ETF tracks the Dow Jones Equity All REIT Capped Index, which consists of all equity REITs in the Dow Jones U.S. Total Stock Market Index.
“SCHH is lean, with a 0.07% expense ratio, and excludes mortgage REITs, focusing strictly on equity REITs,” Lyulkin says. He notes that his firm views this ETF as “pure play” on property operations. It has less exposure to interest-rate volatility than mortgage REITs, but still benefits from yield compression as rates decline.
With successive Federal Reserve rate cuts, he adds, SCHH’s industrial, multifamily and specialty REIT holdings may benefit. “We view SCHH as a compelling middle-ground bet between stability and upside in a rate-easing cycle, but favor instruments with some mortgage exposure,” he says.
Real Estate Select Sector SPDR Fund (XLRE)
With an expense ratio of 0.08%, XLRE is a concentrated ETF that tracks the real estate sector of the S&P 500, says Andrew Latham, a certified financial planner who serves as content director at Supermoney.com.
He notes that this ETF is top-heavy, holding just 31 names with more than 40% of its assets typically in the top five holdings, including Prologis Inc. (PLD), American Tower Corp. (AMT) and Equinix Inc. (EQIX). “This results in a tech-adjacent tilt and higher volatility,” Latham says.
“This ETF is best for investors looking to make a focused bet on large-cap real estate infrastructure, particularly those with a bullish view on the data, logistics and communications sectors,” he adds, noting that this ETF’s lack of diversification could be a downside in more traditional real estate cycles.
iShares U.S. Real Estate ETF (IYR)
This fund made its debut in 2000, making it the oldest REIT ETF on the market. Like the Schwab SCHH ETF, this one tracks the Dow Jones U.S. Real Estate Index. It’s one of the most liquid real estate ETFs, Latham says, which makes it a popular choice for institutional and tactical investors. “However, its 0.39% expense ratio is steep relative to competitors offering similar or broader exposure for a fraction of the cost,” he says.
“This ETF is best for short-term tactical allocations or traders who prioritize liquidity. For long-term investors, the high fee is a clear drawback,” Latham says.
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iShares Core U.S. REIT ETF (USRT)
Among the REIT ETFs covered here, the iShares USRT has notched the best five-year performance, returning 9.9%. This ETF tracks the FTSE Nareit Equity REITs 40 Act Capped Index of REITs outside of the timberland and telecom industries. Because it’s a capped index, it has rules to keep the fund from being dominated by a small number of holdings. Top-weighted holdings are Welltower Inc. (WELL), Prologis and Equinix.
This ETF has a low expense ratio of 0.08%. That makes it cheaper than VNQ and IYR, notes Michael LaCivita, a CFP at New York-based Domain Money Advisors. “If you are looking to add real estate exposure to your portfolio, this would be my choice,” he says, adding that other REIT ETFs have fairly similar portfolio returns over the past five years.
iShares Select U.S. REIT ETF (ICF)
This is a somewhat concentrated ETF, with just 30 holdings. It’s pegged to the Cohen & Steers Realty Majors Index. The index includes REITs that index creator Cohen & Steers believes “are dominant in their respective property sectors.”
Relative to other REIT ETFs, this one is on the smaller side, with $1.9 billion in assets under management. Its expense ratio, meanwhile, is on the higher side, at 0.32%. High expense ratios can cut into performance, and this ETF hasn’t stood out from the wider field in the past five years, notching a return of 7.2% during that time. However, it has a “sizable cost advantage” over its direct peers, according to Morningstar, and its return for longer periods hovers just above the category average.
SPDR Dow Jones REIT ETF (RWR)
This 102-holding ETF measures performance of the Dow Jones U.S. Select REIT Capped Index. A key screening factor is its exclusion of holdings that may not be closely tied to the value of their underlying real estate.
According to fund manager State Street, “The reason for the exclusions is that factors other than real estate supply and demand, such as interest rates, influence the market value of these companies.”
Its expense ratio of 0.25% is heftier than some other REIT ETFs, although over the past five years it’s outperformed many of its rivals. Top holdings are Prologis, Welltower and Equinix.
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7 of the Best REIT ETFs to Buy originally appeared on usnews.com
Update 10/29/25: This story was previously published at an earlier date and has been updated with new information.
