REIT ETF

By
James Chen
Full Bio

James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media.

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Updated June 29, 2020

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 and the Dow Jones U.S. REIT Index, which cover about two-thirds of the aggregate value of the domestic, publicly-traded REIT market.

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.
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An Introduction To Exchange-Traded Funds (ETFs)

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 generate money 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.

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.