In a period of low interest rates, real estate investment trusts (REIT)—a securitized portfolio of properties—offer the income potential provided by real estate combined with the liquidity of stocks. A real estate exchange-traded fund (ETF), which holds baskets of these securities, offers an especially liquid, low-cost way to invest in the real estate asset class.
With a REIT, investors buy shares and get paid dividend distributions—reaping a total return based on the amount they have invested. Although the returns are less than, say, owning an entire building and reaping all the income from it, the risk is lower as well. A REIT ETF invests in several property-owning real estate companies at once, and of course, this diversification further mitigates an investor's exposure—whereas the individual buying a property is betting on just that one property. Plus, it offers a chance to get into real estate without having to become a landlord or a partner in an investment group.
Below we have chosen the top five real estate ETFs based on quality and assets under management (AUM) as of April 6, 2019. They are listed below from largest to smallest. We evaluated the investment approaches of each fund so that investors can make comparisons of style and results.
- REITs combine the liquidity of stocks with the income and stability of owning real estate. REIT ETFs owns a number of REITs, offering further diversification.
- Smaller REITs come with greater risk but offer greater upside. There are some REITs that do offer exposure to international markets.
- Investing in REITs allows investors the opportunity to gain exposure to the real estate market without the debt, rent collections, or property management.
Vanguard Real Estate ETF (VNQ)
The best bet for most novice investors is to stay focused on the U.S. and buy into the largest public companies tied to the real estate market. VNQ is at the top of the list for broad, diversified exposure and a very reasonable expense ratio. While its primary goal is high income, investors may see appreciation in the overall value, too.
The fund tracks an index that measures the performance of REITs. The specific stocks it holds are part of the MSCI US REIT Index, and they are weighted in a manner that is similar to the weightings in the index. The top-five holdings usually represent a "who’s who" of the largest REIT operators out there, including such players as Simon Property Group (SPG), Crown Castle International (CCI), Prologis (PLD), Public Storage (PSA), and American Tower (AMT).
- Avg. Volume: 7 million
- Net Assets: $61 billion
- P/E Ratio (TTM): 27.6
- Yield: 3.96%
- YTD Return: 17.89%
- Expense Ratio (net): 0.12%
The VNQ ETF has outperformed the S&P 500 by over 54 percentage points on a total return basis over the last decade.
Schwab U.S. REIT ETF (SCHH)
SCHH invests in REITs from the Dow Jones U.S. Select REIT Index but may invest in others that are not included in the index as well. Among the REITs that are part of the index, the fund assigns weights that are similar to the weightings in the index.
- Avg. Volume: 828,000
- Net Assets: $5.45 billion
- P/E Ratio (TTM): 31.5
- Yield: 2.85%
- YTD Return: 16.7%
- Expense Ratio (net): 0.07%
iShares U.S. Real Estate ETF (IYR)
As the name implies, IYR is another domestic specialist. The fund invests mostly in REITs and attempts to keep 90% of its assets in securities that are in the Dow Jones U.S. Real Estate Index. The companies represented by those securities may be large-cap, mid-cap, or small-cap, but the emphasis tends to be on the large-cap players.
The percentage of assets in any particular size of a company is dependent on the underlying index. Its fund managers may change the mix of holdings to more closely reflect the performance of the benchmark.
- Avg. Volume: 9.1 million
- Net Assets: $4.6 billion
- P/E Ratio (TTM): 33.7
- Yield: 3.0%
- YTD Return: 17.4%
- Expense Ratio (net): 0.43%
iShares Cohen & Steers REIT ETF (ICF)
This fund seeks results similar to the Cohen & Steers Realty Majors Index, which is composed largely of REITs. The fund invests at least 90% of its assets in those REITs, or in depositary receipts representing the REITs. In particular, ICF looks for companies that may be acquired or that may acquire other companies as part of the consolidation of the real estate sector.
- Avg. Volume: 124,000
- Net Assets: $2.18 billion
- P/E Ratio (TTM): 14.3
- Yield: 2.7%
- YTD Return: 17.3%
- Expense Ratio (net): 0.34%
SPDR Dow Jones REIT ETF (RWR)
RWR uses the Dow Jones U.S. Select REIT Index as its benchmark and has a lot of overlap with VNQ. Its money managers attempt to invest in securities whose valuation is closely tied to each company’s actual real estate holdings, and avoid companies that are valued based on considerations other than their real estate.
- Avg. Volume: 249,000
- Net Assets: $2.94 billion
- P/E Ratio (TTM): 33.4
- Yield: 3.7%
- YTD Return: 16.3%
- Expense Ratio (net): 0.25%
Other REIT Options
Though they offer more risk, smaller REIT firms have an opportunity to grow faster than the larger players in the industry. To that end, the Invesco KBW Premium Yield Equity REIT ETF (KBWY) was built to have at least 90% of its assets in small- and mid-cap holdings of the KBW Premium Yield Equity REIT Index (on Nasdaq) listed in the ETF’s name.
The current yield is at 7.0%, though the expense ratio is getting up there at 0.35%. Total assets are also relatively small at around $348 million, which could make liquidity a concern to some investors.
Rising interest rates can put downward pressure on the stock price of REITs.
Real estate outside the U.S. has decent growth prospects as well. And though most don't have a market as developed as the REIT market in the U.S., growth can be more robust, such as in certain emerging markets or those in Europe that are in the early stages of an economic recovery.
To supplement the VNQ detailed above, Vanguard logically offers the Vanguard Global ex-U.S. Real Estate ETF (VNQI). It has $6.3 billion in assets and a 3.95% yield. The expense ratio is 0.12%, extremely reasonable considering that international funds generally charge more than domestic ones.
The Bottom Line
Investors do not have to raise large down payments to get into real estate. The ETFs listed above offer investors an opportunity to participate in the real estate market without debt, down payments, rent collections, property management, or other burdens of ownership. And they are reasonably insulated from risk. REITs themselves hold numerous properties, and REIT ETFs hold numerous REITs, so investors are well-protected from losses due to any one property failure.