Real estate exchange-traded funds (ETFs) hold baskets of securities in the real estate sector, providing investors with a less expensive way to invest in the industry compared to other options. These funds often focus specifically on real estate investment trusts (REITs), which are securitized portfolios of real estate properties. REITs offer investors income potential as well as the liquidity of traditional stocks. Some of the major names in the REIT space include Vornado Realty Trust (VNO) and Welltower Inc. (WELL).
Investing in these and other REITs allows investors to receive dividend distributions. Although the financial returns may be lower than owning an entire building and pocketing all the rental income, there is less risk.
- The real estate sector outperformed the broader market over the past year.
- The REIT ETFs with the best one-year trailing total returns are KBWY, NURE, and VRAI.
- The top holdings of these three ETFs are Global Net Lease Inc., Extra Space Storage Inc., and Steel Dynamics Inc., respectively.
There are 32 REIT ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as ETFs with less than $50 million in assets under management (AUM). The real estate sector, as measured by the S&P 500 Real Estate Sector Index, outperformed the broader equity market over the past year. The index provided a total return of -0.1% over the past 12 months, above the S&P 500's total return of -3.1%, as of Aug. 17, 2022. The best-performing REIT ETF over the past 12 months is the Invesco KBW Premium Yield Equity REIT ETF (KBWY).
We look at the best three REIT ETFs below. All numbers below are as of Aug. 17, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
Invesco KBW Premium Yield Equity REIT ETF (KBWY)
- One-Year Trailing Total Return: 6.3%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 5.52%
- Three-Month Average Daily Volume: 132,356
- Assets Under Management: $311.0 million
- Inception Date: Dec. 2, 2010
- Issuer: Invesco
KBWY is designed to track the KBW Nasdaq Premium Yield Equity REIT Index, which is based on a modified dividend yield weighting methodology. The fund focuses on the lower end of the market capitalization spectrum, with around 80% of the portfolio allocated to small-cap REITs and the remaining 20% invested in mid-cap firms. The index and fund undergo rebalancing on a quarterly basis, which occurs on the third Friday of the final month in each quarter.
The top holdings of the Invesco KBW Premium Yield Equity REIT ETF include Global Net Lease Inc. (GNL), which invests in commercial properties primarily in the U.S. and Europe; Class A shares of The Necessity Retail REIT Inc. (RTL), specializing in U.S. retail and service-oriented properties; and Omega Healthcare Investors Inc. (OHI), a REIT focused on nursing and assisted living facilities.
Nuveen Short-Term REIT ETF (NURE)
- One-Year Trailing Total Return: 5.1%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 2.05%
- Three-Month Average Daily Volume: 35,572
- Assets Under Management: $125.2 million
- Inception Date: Dec. 19, 2016
- Issuer: TIAA
The Nuveen Short-Term REIT ETF aims to track the Dow Jones U.S. Select Short-Term REIT Index, which is composed of U.S. exchange-traded equity REITs with holdings concentrated in apartment buildings, hotels, self-storage facilities, and manufactured home properties. The ETF provides exposure to REITs with short-term lease agreements. These types of REITs are likely to be less sensitive to interest rate changes than REITs with longer-term lease agreements. Just over half of the fund's holdings consist of apartment REITs, with self-storage and hotel REITs making up the bulk of the remainder.
NURE's top holdings are Extra Space Storage Inc. (EXR) and Public Storage (PSA), two REITs that operate self-storage facilities, as well as AvalonBay Communities Inc. (AVB), which holds ownership interest in apartment communities throughout the U.S.
Virtus Real Asset Income ETF (VRAI)
- One-Year Trailing Total Return: 3.7%
- Expense Ratio: 0.55%
- Annual Dividend Yield: 3.88%
- Three-Month Average Daily Volume: 15,928
- Assets Under Management: $139.1 million
- Inception Date: Feb. 7, 2019
- Issuer: Vital Investment Partners
The benchmark of the Virtus Real Asset Income ETF is the Indxx Real Asset Income Index, offering investors exposure to a basket of equities in the real estate, natural resources, and infrastructure sectors. According to ETF issuer Virtus Investment Partners, VRAI "differs from other real asset strategies in that it does not directly invest in hard assets or commodity instruments; rather, it exclusively invests in stocks in real asset categories and has a specific focus on income." With its diversified approach across a variety of segments, VRAI provides growth opportunities as well as potential inflation protection.
True to its multi-faceted composition, VRAI's top holdings include Steel Dynamics Inc. (STLD), which engages in metal production and recycling; Delek Logistics Partners LP (DKL), a midstream oil and gas company; and Class A shares of Sitio Royalties Corp. (STR), which invests in oil and gas royalties in the U.S.
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