Real estate exchange traded funds (ETFs) allow investors to buy shares and receive dividend distributions based on their investment. This provides a unique angle to real estate investing, which often uses leverage, whereby a buyer borrows against most of a property’s value to gain income from the property, even though the buyer only put part of the money into the property.
A real estate ETF, on the other hand, invests in several real estate companies simultaneously, versus the individual investor buying and betting on one property. Because the investor does not have to borrow money to buy the real estate, there is no debt to repay.
Investopedia has selected the following real estate ETFs as the top five ETFs that allow investors to get into real estate without having to be a landlord or a partner in an investment group. The top five real estate ETFs are based on assets under management as of July 17, 2017.
They are listed from largest to smallest. The investment approaches of each fund were evaluated so investors can compare styles and results.
1. Vanguard REIT ETF (VNQ)
VNQ’s main goal is high income. Investors can also experience growth in the value of their investment, but that is secondary. VNQ tracks an index that measures the performance of real estate investment trusts (REITs).
The REITs’ specific stocks are part of the MSCI U.S. REIT Index. The holdings get weighted in a manner similar to the index’s weightings.
This ETF is by far the largest real ETF, with over $30 billion in assets, and one of the cheapest, with an expense ratio of 0.12%, according to Morningstar.
VNQ tracks a broad index that captures a large portion of the U.S. real estate market, according to ETF.com. The market cap allocations reflect those of ETF.com’s neutral benchmark. It only deviates in the persistent sector bias away from specialized REITs in favor of commercial ones.
VNQ offers massive assets and is extremely cheap to hold, according to ETF.com. Its portfolio management has brought the cost of owning VNQ even lower than its stated expense ratio.
The only downside is that Vanguard discloses holdings monthly rather than daily. This, however, is true for most low-turnover funds, and not important to many investors.
VNQ trades high volumes daily with penny-wide spreads. Distributions from he fund get taxed as ordinary income, as with peer REIT ETFs.
ETF.com gives VNQ an “Analyst Pick” in a crowded field for solid coverage at very low all-in costs.
• Avg. Volume: 4,206,246
• Net Assets: $63.32 billion
• PE Ratio (TTM): 7.48
• Yield: 4.43%
• YTD Return: 2.55%
• Expense Ratio (net): 0.12%
2. iShares U.S. Real Estate ETF (IYR)
Investors in IYR seek results similar to shares in the Dow Jones U.S. Real Estate Index. IYR invests mostly in REITs and tries to keep 90% of its assets in securities that are in the index. Companies represented by those securities can be large, mid or small cap.
The percentage of assets in any particular size company relies on its underlying index. Money managers can adjust the mix to more closely reflect the benchmark’s performance.
IYR, one of the first U.S. real estate ETFs, remains a stalwart of the space, according to ETF.com. The fund tracks a broad real estate index and captures a large portion of the real estate space.
IYR holds about 100 companies, covering all the big names. Its performance and overall portfolio characteristics align well with ETF.com’s neutral benchmark.
IYR’s big asset base facilitates abundant liquidity — it is among the most traded real estate ETFs. The fund is, however, expensive to hold compared to peers that track similar indexes. Distributions from the fund are taxed as ordinary income.
IYR’s coverage of U.S. real estate in an ETF is tough to beat, according to ETF.com.
• Avg. Volume: 6,903,919
• Net Assets: $4.78 billion
• PE Ratio (TTM): 6.81
• Yield: 4.06%
• YTD Return: 5.61%
• Expense Ratio (net): 0.44%
3. iShares Cohen & Steers REIT ETF (ICF)
iShares Cohen & Steers seeks results similar to the Cohen & Steers Realty Majors Index. The index comprises REITs, in which the fund invests at least 90% of its assets, or in depositary receipts that represent the REITs. The fund seeks companies that can be acquired or that can acquire other companies as part of the real estate sector’s consolidation.
ICF is designed to capture the top end of the real estate market, offering the returns of the 30 largest players in the space, according to ETF.com. The concentrated, large-cap-oriented portfolio provides the lion’s share of its assets in just 10 names.
The limited scope of the fund also produces notable sub-sector tilts compared to ETF.com’s broad real estate benchmark. ICF is a big, well-run ETF with an extensive history and limited structural risks or tax surprises.
The fund’s expense ratio is on the high side, but its tight tracking and deep liquidity deliver reasonable costs. ICF overall makes good on its promise of access to the “realty majors,” even if it does not capture the complete flavor of the U.S real estate market.
• Avg. Volume: 214,214
• Net Assets: $3.25 billion
• PE Ratio (TTM): 12.87
• Yield: 3.85%
• YTD Return: 3.07%
• Expense Ratio (net): 0.35%
4. Schwab U.S. REIT ETF (SCHH)
SCHH mainly invests in REITs from the Dow Jones U.S. Select REIT Index, but can also invest in assets not included in the index. The REITs that are part of the index assigns weights similar to the index’s weightings.
The ETF tracks a market-cap-weighted index of EITs, excluding mortgage REITs and companies involved in real estate finance.
The Schwab US REIT ETF is among the strongest entries in the real estate ETF lineup and is a direct challenger to RWR, the real estate ETF behemoth, according to ETF.com. SCHH tracks the same index as RWR, but does so at a fraction of the holding cost.
With outstanding liquidity, the fund provides a low cost for a broad and diversified array of U.S. REITs. SCHH’s solid “Fit” score from ETF.com reflects its holdings, which mirror that of the U.S. real estate market, but with a bias to the core real estate sub-sectors of residential and commercial properties. For diverse real estate exposure at a low cost, SCHH provides one of the best options, particularly for long-term investors, according to ETF.com.
• Avg. Volume: 517,073
• Net Assets: $3.29 billion
• PE Ratio (TTM): N/A
• Yield: 2.64%
• YTD Return: -1.19%
• Expense Ratio (net): 0.07%
5. SPDR Dow Jones REIT ETF (RWR)
SPDR Dow Jones REIT ETF, on the largest real estate ETFs, uses the Dow Jones U.S. Select REIT Index as its benchmark. RWR money managers invest in securities whose valuations are closely tied to each company’s actual real estate holdings, and avoid those that are valued based on considerations other than their real estate.
The SPDR Dow Jones REIT ETF tracks a market cap weighted index of companies involved in the operation and ownership of residential, commercial, healthcare and other real estate.
RWR is one of the oldest real estate ETFs, according to ETF.com. Since 2001, it has offered investors a liquid and well managed vehicle to invest in a diverse, market-cap-weighted group of U.S. REITs.
The fund tilts away from “specialized REITs,” including everything from railway REITs and hospital REITs, and instead overweights the “quintessential” real estate sub-sectors, such as residential and commercial REITs. Hence, it could appeal to investors seeking a “pure play.”
RWR’s strategy has been a hit, drawing billions in assets, and in turn providing deep liquidity. Its only liability is the expense ratio, which is several times higher than that of its main competitor, SCHH, which tracks the same Dow Jones index.
While RWR offers solid coverage in a liquid and large package, cheaper options do exist for long-term holders.
• Avg. Volume: 184,200
• Net Assets: $3.03 billion
• PE Ratio (TTM): N/A
• Yield: 3.98%
• YTD Return: 1.12%
• Expense Ratio (net): 0.25%
The bottom line on REIT ETFs is that investors do not need to raise large down payments to get into real estate, thanks to ETFs. The ones listed above offer an opportunity to participate in the real estate market with no debt, rent collections, down payments, or property marketing.
The REITs hold numerous properties, and the funds hold numerous REITs, so investors can be protected from losses on account of any one property failure.
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