What Is a REIT ETF?
Real estate investment trust (REIT) ETFs are exchange-traded funds (ETFs) that invest the majority of their assets in equity REIT securities and related derivatives. REIT ETFs are passively managed around an index of publicly-traded real estate owners.
Two frequently used benchmarks are the MSCI U.S. REIT Index, which includes 123 constituent REITs, and the Dow Jones U.S. REIT Index, with 107 constituent REITs.
Key Takeaways
- Real estate investment trust (REIT) exchange-traded funds (ETFs) invest in equity REITs and related derivatives.
- REIT ETFs are passively managed and designed to mirror REIT indexes.
- These ETFs tend to be “top-heavy,” where the largest REITs make up a greater weighting.
- Investing in REITs through a REIT ETF is a way for shareholders to engage with this sector without needing to personally contend with its complexities.
How REIT ETFs Work
Real estate investment trust (REIT) securities have traits of both equities and fixed income securities. Their high-dividend yields provide consistent income, but valuations can swing along with the equity market. REITs must pay out the majority of profits to investors each year. Many REIT ETFs are stakeholders in REITs that own income properties that generatemoney through rent and leasing activity. Such properties can include warehouses, apartment complexes, and hotels.
Investors should closely read prospectus materials when researching REIT ETFs. Many different indexes exist with varying areas of focus such as commercial mortgages and high-risk mortgages. Investors may unknowingly have exposure to these more "risker" areas of the real estate market.
$2.5 Trillion
The total assets of all publicly-traded U.S. REITs.
Special Considerations
REIT ETFs are by design intended to emulate or mirror REIT indexes. This means that REIT ETFs may be “top-heavy” with the largest REITs making up a greater weight of their value. A REIT ETF might invest in smaller REITs but typically this is done to a lesser degree.
Some perspectives view the REIT ETF model as a way for investors to earn steady returns over time. While they might seem highly concentrated on the top REITs, those REITs have developed track records for performing well and generating revenue. REITs must also pay at least 90% of its income to shareholders via dividends, making them solid dividend investments.
Though much of the real estate market was hit hard during the financial crisis, many REITs continued to prosper. The fiscal durability of such REITs is often attributed to experienced management. The leadership at a large REIT tends to have a specialized understanding of the real estate market and its fluctuations.
Investing in REITs through a REIT ETF is a way for shareholders to engage with this sector without needing to personally contend with its complexities. The largest REITs generate a major portion of the industry’s revenue. This does not make REITs immune to market shifts. Some REITs have faced steep price declines that may have followed excess speculation by investors.
Investing through a REIT ETF might not allow for direct control over which REITs’ shares will be purchased. Investors can study the REITs that are being invested in as well as the portfolio of properties they hold.
What Is a Real Estate Investment Trust (REIT)?
A real estate investment trust, or REIT, is a company that buys real estate properties and uses the rental cash flow to provide a dividend to its investors. REITs are common in commercial real estate and a growing presence in the market for residential real estate.
What Is the Biggest REIT ETF?
The Biggest U.S. REIT ETF is the Vanguard Real Estate ETF, with $27 billion in assets. The next largest is the Schwab US REIT ETF with $5 billion.
How Do You Invest in a REIT ETF?
You can invest in a REIT ETF through a brokerage, such as Fidelity, in the same way that you would invest in a company stock. Simply search for the ETF you want to invest in using the broker's screener, or look for an option to browse among available investments.
The Bottom Line
A REIT ETF allows an investor to gain exposure to the real estate market, without going to the trouble of buying and managing property. These funds also gain exposure to a wide basket of real estate properties, without relying on the performance of any one REIT. Because they tend to offer strong dividends, these investments are an attractive choice for people looking for exposure to the real estate market.
FAQs
REITs generate income through rents, while REIT ETFs own a collection of REIT investments. Investors can buy and sell shares of REIT ETFs on stock exchanges, while REITs can be publicly traded, non-traded, or private.
What are the factors to be considered when investing in REITs? ›
Compared to other investments such as stocks and bonds, REITs are subject to various risk factors that affect the investor's returns. Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.
What is special about REITs? ›
REITs offer a number of attractive attributes such as growth, income, and diversification. REITs have historically delivered strong results and provide attractive income relative to other asset classes. They offer diversification relative to traditional investments like stocks and bonds.
What is the most significant feature of a REIT? ›
One of the main advantages of investing in REITs is the potential for tax benefits, as they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
What is REIT and how it works? ›
REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
What are the pros and cons of REIT stocks? ›
Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.
Why are REITs high risk? ›
Risks of Non-Traded REITs
Non-traded REITs or non-exchange traded REITs do not trade on a stock exchange, which opens up investors to special risks such as: Share Value: Non-traded REITs are not publicly traded, meaning investors cannot research investments. As a result, it's difficult to determine the REIT's value.
What are the problems with REITs? ›
But some REITs had issues that were brought to light in large part by the real estate and credit crisis of 2008 – shutting off redemptions, unclear valuations, high fees, a lack of liquidity, and not generating enough revenue to cover monthly and quarterly distributions.
How do REIT owners make money? ›
Equity REITs
Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.
Can you sell a reit at any time? ›
Investors can buy and sell shares of public REITs at any time during trading hours. With private REITs, on the other hand, investors may have to wait for a redemption event, which can occur quarterly or annually, before they can cash out their investment. Additionally, private REITs may charge redemption fees.
REITs offer investors the benefits of real estate investment along with the ease and advantages of investing in publicly traded stock. REITs have historically provided investors dividend-based income, competitive market performance, transparency, liquidity, inflation protection and portfolio diversification.
What are the tips for investing in REITs? ›
When you're ready to invest in a REIT, look for growth in earnings, which stems from higher revenues (higher occupancy rates and increasing rents), lower costs, and new business opportunities. It's also imperative that you research the management team that oversees the REIT's properties.
What is the objective of a REIT? ›
REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.
Is it better to invest in a REIT or REIT ETF? ›
An ETF gives you an affordable way to follow the stock market or a particular part of the market. While REITs provide the stability and robust returns of real estate.
How do you make money on a REIT? ›
Equity REITs
Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.
Does REIT ETF pay dividends? ›
Real estate investment trust (REIT) ETFs typically pay nonqualified dividends (although a portion may be qualified).
How does a REIT pay out? ›
The common denominator among all REITs is that they pay dividends consisting of rental income and capital gains. To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends.
