There are several reasons to add real estate investment trusts, or REITs to your portfolio.
They pay above-average dividend yields, as they pay no corporate tax as long as they pay out nearly all of their income as dividends.
And REITs can have tremendous long-term growth potential. Real estate value tends to rise over time, and REITs use a variety of other strategies to create shareholder value. For example, a REIT can
- develop properties from the ground-up,
- renovate to add value to existing properties, and
- strategically sell assets that have performed well to recycle that capital in other ways.
REITs can help diversify your portfolio, too. Publicly traded REITs are technically stocks, but most experts say real estate is a different asset class than equities.
Why use ETFs to invest in REITs?
So why might you want to use exchange-traded funds, or ETFs to invest in REITs? The answer is similar to why you might use ETFs to invest in stocks or bonds. Buying a REIT ETF eliminates the need to research and evaluate individual REITs. Plus, since most REITs invest in a single type of commercial property, a REIT ETF can give you broader exposure to commercial real estate assets.
Buying a REIT ETF eliminates the need to research and evaluate individual REITs. Plus, since most REITs invest in a single type of commercial property, a REIT ETF can give you broader exposure to commercial real estate assets.
3 top REIT ETFs to consider
|ETF (Symbol)||Total Assets||Expense Ratio||Dividend Yield|
|Vanguard Real Estate Index Fund (NYSEMKT: VNQ)||$64 billion||0.12%||3.9%|
|Schwab U.S. REIT ETF (NYSEMKT: SCHH)||$5 billion||0.07%||2.8%|
|iShares Global REIT ETF (NYSEMKT: REET)||$2 billion||0.14%||5.0%|
To be clear, these all invest in equity REITs, which are real estate investment trusts that own commercial properties. You can also invest in mortgage REIT ETFs, an entirely different type of fund.
The Vanguard REIT Index Fund is the largest real estate ETF in the market by a wide margin. It tracks a weighted index of publicly traded REITs, meaning that larger REITs make up a larger part of the ETF’s assets.
The Schwab U.S. REIT ETF is similar in composition. It tracks an index of U.S. REITs, but with a few major differences from Vanguard. For example, the Schwab ETF doesn’t own the major communications REITs like American Tower (NYSE: AMT), as there's debate on whether these are telecom stocks.
The iShares Global REIT ETF is similar to the Schwab ETF in that it has non-telecom equity REITs. But it also invests in foreign REITs. These can add another layer of diversification and mitigate risks related to currency fluctuations and U.S.-specific economic weakness.
There are many other REIT ETFs, and most have a similar composition to the three listed here. These are my personal favorites because they represent three different investment strategies and have low expense ratios.
The bottom line
Investing in a REIT ETF lets you enjoy the high dividends, long-term growth opportunity, and portfolio diversification that comes with real estate investing. But it means you don't have to choose a particular REIT or property type. In a nutshell, it gives you the benefits of REITs without the guesswork or homework of choosing individual REITs.