Real estate has been a great vehicle for increasing wealth. According to Forbes, real estate was the primary wealth-creating vehicle for 215 of the world's 2,755 billionaires. Meanwhile, it has helped countless millionaires amass and enhance their wealth.
However, real estate investing isn't just for the rich. Thanks to Congress, anyone can invest in wealth-creating commercial real estate through real estate investment trusts (REITs). And the financial service industry has made it even easier to invest in a diversified portfolio of commercial real estate by developing several exchange-traded funds (ETFs) focused on the sector.
Here's a closer look at how these two investment vehicles can combine into an easy way to start investing in real estate.
Best REIT ETFs
Best REIT ETFs
Congress created REITs in 1960 to allow the average investor to participate in the wealth-creating ability of cash-flowing commercial real estate. These entities own pools of rental properties or real estate-backed loans that generate rental or interest income. They must distribute at least 90% of their taxable net income to shareholders via dividend payments to remain in compliance with IRS regulations. REITs require less work and capital than buying a property outright. They're also less risky, highly liquid, and have historically delivered strong performances versus the S&P 500.
However, with more than 200 publicly traded REITs focused on a dozen property sectors, it can be challenging for beginning investors to know where to start. While you could invest in individual REITs, you risk picking the wrong ones that are at risk of a dividend cut.
That's where ETFs can help. These entities hold several REITs and other real estate stocks, giving investors broad exposure to the sector, which helps reduce risk. Some of the top real estate ETF options are:
| Top REIT ETFs | Ticker Symbol | Performance (Total Returns) Over the Past 12 Months | Inception Date | Issuer | Assets Under Management (AUM) |
|---|---|---|---|---|---|
| Vanguard Real Estate ETF | (NYSEMKT:VNQ) | 22.2% | 9/23/2004 | The Vanguard Group | $84.7 billion |
| iShares U.S. Real Estate ETF | (NYSEMKT:IYR) | 21.4% | 6/12/2000 | BlackRock (NYSE:BLK) | $5.6 billion |
| Schwab U.S. REIT ETF | (NYSEMKT:SCHH) | 24.4% | 1/13/2011 | Charles Schwab (NYSE:SCHW) | $7.3 billion |
| Real Estate Select SPDR Fund | (NYSEMKT:XLRE) | 28.2% | 10/7/2015 | SSGA Funds Management, Inc. | $5.3 billion |
| iShares Cohen & Steers REIT ETF | (NYSEMKT:ICF) | 27.3% | 1/29/2001 | BlackRock | $2.7 billion |
Here's a closer look at these top REIT ETFs.
Vanguard Real Estate ETF
Vanguard Real Estate ETF
The Vanguard Real Estate ETF is a behemoth among REIT ETFs, with more than 10 times the assets under management of its nearest competitor. It invests in REITs and other real estate stocks. In early 2022, the ETF held 168 real estate stocks, led by the following five:
- Vanguard Real Estate II Index Fund: 11.3% of the portfolio
- Prologis (PLD -2.32%): 6.5%
- American Tower (AMT -1.75%): 6.5%
- Crown Castle International (CCI -1.75%): 4.4%
- Equinix (EQIX -1.27%): 3.7%
This broad REIT ETF offers investors several forms of diversification. Of its nearly 170 stocks, its largest holding is a related REIT index fund that holds shares of 166 REITs and real estate stocks. Meanwhile, its other top five holdings include the biggest REITs by market cap. This list features the largest industrial REIT in Prologis, the top two infrastructure REITs (American Tower and Crown Castle), and the leading data center REIT in Equinix. That gives investors some diversification across property types.
Overall, its 10 largest holdings make up 44.9% of its portfolio. As a result, the ETF offers broad exposure to the entire REIT sector, with a focus on the largest REITs that dominate the industry.
One factor that sets the Vanguard Real Estate ETF apart from others is its ETF expense ratio. At 0.12%, it's more than 50% below the industry average of 0.24%. That enables investors to keep more of their returns.
iShares U.S. Real Estate ETF
iShares U.S. Real Estate ETF
The iShares U.S. Real Estate ETF invests in domestic real estate stocks and REITs. This ETF, managed by BlackRock, had 87 stock holdings as of early 2022, led by the following five:
- Prologis: 7.7%
- American Tower: 7.4%
- Crown Castle: 5.4%
- Equinix: 4.3%
- Public Storage (PSA -0.09%): 4%
Those are the five biggest REITs and operate across several property types, including industrial, communications infrastructure, data centers, and self-storage REITs. Overall, the ETF's 10 largest holdings make up 42% of its portfolio, providing investors with slightly more diversification than Vanguard's ETF even though it has half the number of stocks.
One of the downfalls of this REIT ETF is its expense ratio. At 0.41%, it's well above the industry average. Because of that, it has slightly underperformed its benchmark over the years as the higher fee has eaten into its returns.
Schwab US REIT ETF
Schwab US REIT ETF
This ETF provides simple access to REITs since it only holds those entities, unlike other ETFs that include non-REIT real estate stocks in their portfolio. It had 139 REITs in the fund as of early 2022, led by the following five:
- American Tower: 8.3%
- Prologis: 7.7%.
- Crown Castle: 5.6%.
- Equinix: 4.5%.
- Public Storage: 3.6%.
Like many other REIT ETFs, the Schwab fund holds REITs based on their market cap instead of using an equal weighting system. Thus, it has nearly identical top holdings as most other top REIT ETFs. Meanwhile, its top 10 make up 43.5% of its portfolio.
Its expense ratio stands out. It's an ultra-low 0.07%, allowing investors to keep more of the returns from the underlying REITs.
Real Estate Select SPDR Fund
Real Estate Select SPDR Fund
The Real Estate Select SPDR Fund allows investors to make a more direct investment in real estate. This ETF only holds REITs in the S&P 500 Index, which limits its investment pool. As of early 2022, this ETF held only 29 REITs, led by some familiar names:
- Prologis: 11.2%.
- American Tower: 10.7%
- Crown Castle: 7.7%.
- Equinix: 6.4%.
- Public Storage: 5.8%.
As the five largest REITs, it's no surprise to see this group leading the way. Further, because this ETF concentrates only on REITs in the S&P 500, its top 10 holdings made up 61% of its portfolio. That makes it an ideal option for investors seeking to focus on the largest REITs.
This ETF has a low expense ratio of 0.1%. Consequently, it's a solid option for investors seeking low-cost exposure to the biggest REITs.
iShares Cohen & Steers REIT ETF
iShares Cohen & Steers REIT ETF
The iShares Cohen & Steers REIT ETF is another REIT ETF managed by BlackRock. It takes a slightly different approach to invest in REITs. This ETF focuses on holding large real estate companies that are dominant in their respective property categories. As a result, it has a concentrated portfolio of 30 REITs.
However, these 30 include some familiar names, led by:
- Crown Castle: 8%
- Prologis: 7.9%.
- American Tower: 7.7%
- Equinix: 7%.
- Public Storage: 6.4%.
Overall, its top 10 holdings made up 58% of its portfolio as of early 2022.
Because this ETF takes a more active approach to investing in REITs, it charges a relatively higher expense ratio of 0.33%. It's best for investors who want to focus on the dominant REITs without limiting themselves to only those in the S&P 500.
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These ETFs make it easy to invest in REITs
REITs have historically generated attractive total returns for investors by providing them with above-average dividend income and price appreciation. With so many great ones to choose from, it can be hard for investors to determine the best REITs for their portfolio. That's where REIT ETFs can help. They make it easy to invest in the sector by providing investors with broad exposure to the leading REITs. While most REIT ETFs have similar top holdings, all of the best ones offer their own unique spin, giving investors several excellent options.
