Historically, real estate has proven to be an excellent way to diversify an investment portfolio. To many investors, it is a fourth asset class, next to stocks, bonds and cash, valued for its growth and income capabilities. 

While investing directly in real estate might be appealing to some, many people would like to include this asset class in their investment portfolios without the problems associated with owning and maintaining a property or dealing with tenants. Fortunately, there are several ways to invest in real estate without purchasing property. Two of the most popular methods are real estate investment trusts (REITs) and funds that invest in REITs or real estate-related companies.

REITs

REITs are companies formed for the purpose of investing in real estate properties. Most REITs specialize in a particular segment of the real estate market, such as office space, storage facilities, industrial parks, shopping malls, hotels or apartment buildings. Some REITS diversify among several different types of properties. A trust is funded with capital to purchase a portfolio of properties which it manages and from which it collects rents. REITs are required to pay out at least 90% of their taxable income in the form of dividends to shareholders. REIT shares can be bought and sold just like any stock.

One of the more popular REITs is Realty Income Corporation (NYSE: O); it invests primarily in triple-net leased properties which are owned by the REIT and leased by high profile tenants such as Walgreen Co. (NYSE: WAG), Wal-Mart Stores, Inc. (NYSE: WMT), Circle-K Corporation and Family Dollar Stores (NYSE: FDO). Realty Income has a long track record of triple-net real estate investing which has led to 75 dividend increases since 1994. As of April 19, 2016, its trailing 12-month return was 3.65% and its 10-year annual return was 13.72%. Year to date (YTD), Realty Income was up 23.47%.

REIT Exchange-Traded Funds

For investors looking for more diversification in a real estate portfolio, a REIT exchange-traded fund (ETF) is similar to a fund-of-funds, which is a fund that invests in a portfolio of other funds. In this case, the fund invests in a portfolio of REITs. Two of the more popular REIT ETFs are the Vanguard REIT ETF (NYSEARCA: VNQ) and the iShares U.S. Real Estate ETF (NYSEARCA: IYR).

The Vanguard REIT ETF is the largest in its category with $30.89 billion in assets under management (AUM). For a very low expense ratio of 0.12%, investors get exposure to more than 120 different real estate companies from a variety of real estate sectors. The fund has a very attractive trailing 12-month yield of 4.21% and it has delivered steady returns of 7.18% over 10 years and 11.77% over five years, as of April 2016.

The iShares U.S. Real Estate fund offers even more diversification in U.S. real estate markets. In addition to the typical commercial REITs that most funds hold, this ETF invests in specialty REITs that themselves invest in mortgages, timber and even prisons. The $4.52 billion fund has a trailing 12-month yield of 4.09% with an expense ratio of 0.43%. Over the last 10 years, as of April 2016, the fund has returned 5.46%, and its five-year return is 9.97%.

Globally Diversified Real Estate Funds

Investors who want the broadest possible diversification in a real estate portfolio can invest in funds with international real estate holdings. U.S. companies make up less than 50% of the world's real estate securities. As with global stock markets, global real estate markets don't all move in tandem. A globally diversified portfolio can capture returns wherever they occur and reduce the risk associated with any one market.

The SPDR Dow Jones Global Real Estate ETF (NYSEARCA: RWO) is the largest fund to hold both U.S. and international real estate companies. As of April 19, 2016, the fund has $2.21 billion in AUM weighted 58.72% toward U.S. stocks and 39.35% toward foreign stocks. Its trailing 12-month yield is 3.13%, and its expense ratio is 0.5%. This ETF has returned 8.92% over the last five years and it is up 5.87% YTD in 2016.

For investors who already own a U.S. REIT, the $3.40 billion Vanguard Global ex-U.S. Real Estate Fund (NYSEARCA: VNQI) would be a good way to diversify globally. This ETF invests in more than 600 non-U.S. stocks from more than 35 countries, and it is the only fund to include emerging-market real estate companies. For a low 0.18% expense ratio, investors receive a 2.84% trailing 12-month yield. This ETF has returned 5.52% over the last five years, and its YTD return is 7.21%.

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