If you want to invest in real estate but can’t afford to invest in properties directly or build a diverse portfolio of REITs, a REIT ETF may be the right starting point for you. With REIT ETFs, you can invest in a diverse range of properties with one low-cost investment—ETFs can be bought and sold like shares of stock on the stock market, and just like stocks, the companies that create and manage ETFs have to provide information to the public that helps you decide if it is a good investment. Before you invest anywhere, it’s important to understand the underlying assets, who manages the fund, and what you’ll pay in fees as a shareholder. Read on for some important things to consider when choosing a REIT ETF.
Understand the Holdings
An ETF is a fund that owns many investments on behalf of a group of investors. REIT ETFs hold REITs and REIT stocks. Many ETFs buy REITs in the form of a stock that meets the requirements to be considered a REIT.
Research the Manager
Many companies create mutual funds and ETFs. You can buy REITs managed by reputable, well-known investment firms that are household names, and some from more obscure companies where you need to do a little more research before investing.
Look into the Fees
ETFs tend to charge relatively low investment management fees compared to mutual funds, but that is not always the case. Look at the fees charged by any fund, and compare to similar funds to make sure you get a good deal.
Remember That All Investments Carry Some Risk
REITs and REIT ETFs are heavily influenced by the same forces that shape the real estate markets. Those include interest rates, employment rates, and other economic factors. As with all investments, understand the risks, expected rate of return, and how your money is managed before handing it over. With those criteria (and caveats) in mind, see below for a list of some of the best REIT ETFs to consider for your investment portfolio. With an expense ratio of just 0.12% ($1.20 for every $1,000 invested), Vanguard claims that its fee could save you over $2,000 in fees on a 10-year, $10,000 investment compared to its competitors. This REIT ETF follows the MSCI U.S. Investable Market Real Estate 25/50 Index. It is considered a little riskier than average, but not among the riskiest classes of ETFs. Like most real estate funds, this fund got hammered in the real estate crash of 2007-2008, but it has offered steady and growing returns since. This is a great way to add real estate to a retirement account or other long-term investment account. Top holdings include Vanguard Real Estate II Index Fund, American Tower Corp, and Prologis Inc. This ETF follows the Dow Jones Equity All REIT Capped Index and charges just 0.07% in fees (70 cents for every $1,000 invested). This ETF holds over 100 assets. Major holdings include American Tower Corporation, Prologis, and Crown Castle International Corporation. You’ll notice some overlap with the Vanguard fund above, but as they follow different indices, they contain different assets. The iShares Global REIT ETF charges a competitive 0.14% management fee ($1.40 for every $1,000 invested). Major holdings include Prologis, Equinix, and Public Storage. This fund is invested 70% in the United States, 7% in Japan, 6% in Australia, 5% in the United Kingdom, and the rest in Australia, Canada, Singapore, and France, with “other countries” making up 3% of total assets. These are generally developed, strong economies with stable real estate markets. This ETF is benchmarked against the FTSE NAREIT All Mortgage Capped Index. It had a lot of ground to cover as the fund’s inception date was in May 2007. The fund charges 0.48% in management fees ($4.80 for every $1,000 invested). Top holdings include Annaly Capital Management REIT, AGNC Investment REIT, Starwood Property Trust REIT, and Blackstone Mortgage Trust REIT. The fund charges a 0.35% expense ratio ($3.50 for every $1,000 invested). Top holdings include American Finance Trust, Global Net Lease, and Office Properties Income Trust. It charges a 0.35% management fee ($3.50 for every $1,000 invested). Even in the past, when it slightly trailed the index, the fund performed very well, as has the real estate market overall, since 2009. The ProShares Short Real Estate ETF yields the opposite performance of the Dow Jones U.S. Real Estate Index. If the index goes up 5%, this fund should go down roughly 5%, but if the index falls, this investment will increase in value. The fund charges a 0.95% expense ratio ($9.50 for every $1,000 invested) and invests in real estate index swaps at major investment banks like Bank of America, Societe Generale, and Morgan Stanley. Keep in mind that while an asset can go down in value to $0, it can rise forever. That means a short investment can yield dramatic losses when an asset rises in value.
