What Is a REIT ETF?

REIT ETFs are exchange-traded funds 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. The indexes may vary from provider to provider but two frequently used benchmarks are the MSCI U.S. REIT Index and the Dow Jones U.S. REIT Index. Those two indexes cover about two-thirds of the aggregate value of the domestic, publicly-traded REIT market. REIT ETFs are characterized by their above-average dividend yields.


An Introduction To Exchange-Traded Funds (ETFs)

REIT ETFs Explained

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.

Why REIT ETFs Are Used for Long-Term Investments

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.

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.