Top 4 REIT ETFs to Watch
Real estate investment trust (REIT) exchange-traded funds (ETFs) are fantastic investment vehicles. Some are undervalued and poised to outperform many U.S. equities. REITs generally offer diversification, liquidity and dividends, yet there aren’t many investors trading REIT ETFs.
For the same reason there aren’t nearly enough investors making options plays. Because they don’t understand them.
What is a REIT?
A REIT is similar to an ETF or a mutual fund in that it pools together investor money. That money is used to invest in real estate. While a mutual fund manager buys stocks, bonds or other equities, a REIT manager invests in different real estate properties and assets.
The idea behind any investment is that the security will gain value over time. Just as real estate tends to grow more valuable over the years, so will a REIT. The REIT also collects rent from its tenants, and that rent is issued to investors in the form of a dividend. You can think of a REIT as a big landlord.
REIT shareholders get real estate exposure without the headaches that come with being a landlord. REITs usually manage larger complexes like apartment buildings, warehouses, housing developments and hotels.
What is a REIT ETF?
While a REIT represents one individual real estate investment trust, a REIT ETF passively tracks a larger real estate market. An individual REIT’s performance can vary widely. A REIT ETF will minimize that volatility by providing broader exposure. Investors should consider including the funds for a well-diversified portfolio. Here are the top four REIT ETFs to watch:
Top 4 REIT ETFs to Watch
REIT ETF to Watch No. 4: iShares Residential Real Estate Capped ETF (NYSE: REZ)
- Assets Under Management: $314 million
- Expense Ratio: 0.48%
- 5 Year Total Return: 10.6%
iShares is a giant in the ETF space, and we’ve featured two of its REIT ETFs here. The iShares Residential Real Estate Capped ETF is a smaller ETF managing just $314 million in assets. But, as opposed to the more generalized REIT ETFs managed by Schwab and Vanguard, this is a specialized fund.
The iShares Residential Real Estate Capped ETF lets investors narrow their focus on the residential real estate market. This REIT has exposure to apartment buildings, multifamily properties, senior living communities and assisted living facilities. By specializing in residential real estate, investors avoid the risks specific to commercial real estate.
REIT ETF to Watch No. 3: Schwab U.S. REIT ETF (NYSE: SCHH)
- Assets Under Management: $4.41 billion
- Expense Ratio: 0.07%
- 5 Year Total Return: 7.7%
The Schwab U.S. REIT ETF tracks some of the country’s biggest REITs. It holds REITs specializing in industrial properties, shopping malls, healthcare properties, self-storage facilities, residential homes and office buildings. The fund also holds about 115 stocks, which is less than the Vanguard Real Estate Index Fund ETF Shares’ 200 stocks.
This a straightforward fund. It is low cost with a 0.07% expense ratio, which means bigger returns for investors. It is dedicated to REIT stocks and nothing else. There are no mortgage REITs to be found here.
REIT ETF to Watch No. 2: iShares Mortgage Real Estate Capped ETF (CBOE: REM)
- Assets Under Management: $1.16 billion
- Expense Ratio: 0.48%
- 5 Year Total Return: 11%
While the other three ETFs listed here own equity REITs, the iShares Mortgage Real Estate Capped ETF, as its name suggests, owns primarily mortgage REITs. Mortgage REITs work by buying mortgages and becoming the financier for real estate projects. They generate income by earning interest on those investments.
Mortgage ETFs tend to have very high dividend yields. In fact, dividends make up a huge portion of the iShares Mortgage Real Estate Capped ETF’s returns. This fund, and all mortgage REIT ETFs, are susceptible to volatility because of their dependency on interest rates. Mortgage REITs need to borrow money, so when the fed lowers interest rates, this fund will perform better.
REIT ETF to Watch No. 1: Vanguard Real Estate Index Fund ETF Shares (NYSE: VNQ)
- Assets Under Management: $27.8 billion
- Expense Ratio: 0.12%
- 5 Year Total Return: 42%
The Vanguard Real Estate Index Fund ETF Shares is simply the biggest and best REIT ETF on the market. It’s hit it out of the park so far this year with the fund up 26.6% year to date, outperforming the S&P 500 by 11%.
The Vanguard Real Estate Index Fund ETF Shares holds over 200 real estate-related stocks. But retail, residential and office REITs also make up a significant portion of the fund’s holdings. It is involved with the biggest players in the REIT industry like American Tower Corp. (NYSE: AMT), Simon Property Group (NYSE: SPG) and Equinix (Nasdaq: EQIX). The ETF also has some exposure to real estate operating companies, but those holdings only make up 5% of the fund. In other words, this fund has plenty of diversity.
All in all, REIT ETFs offer investors an easy way to get in on the lucrative world of real estate investing. And these four REIT ETFs are some of the best. For more valuable information check out our ETF investing page, and our investment opportunities page. You can also sign up for our free e-letter below. It’s packed with investing insight.