The best REIT ETFs allow investors exposure to the real estate market. "REIT" is an acronym for "real estate investment trust."
REITs constitute an important asset class, as the estimable humorist Mark Twain observed in the 19th century: "Buy land, they're not making it anymore."
Property has real value, particularly in dense urban areas, and there's always strong demand.
Real estate has proven to be a strong income-generating investment, as many different types of property can deliver regular profit-sharing, thanks to monthly rent cycles.
This means you don't have to sell real estate to get a steady stream of cash over time.
Of course, buying a rental property can be expensive and out of reach of most investors — especially these days, as housing prices and mortgage rates climb.
Thankfully, there are vehicles in the stock market that are much more accessible — namely, publicly traded REITs and REIT exchange-traded funds.
But how do you find the best REITs to buy?
What is a REIT?
A REIT, or real estate investment trust, is a special class of company that must deliver 90% of its taxable income back to shareholders. In exchange, REITs get preferential tax treatment for their operations.
This tradeoff was developed in part because REITs require a lot of capital to own and maintain massive real estate holdings.
The thinking goes that if you incentivize this business structure, companies can provide economic growth potential — as long as they pass some of their success on to shareholders.
This creates a mandate for big dividends, one of the big appeals of REITs.
In addition to boasting some of the highest dividend yields, REITs are much cheaper to buy than physical real estate, as you only have to purchase a single share.
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How to find the best REIT ETFs
The upside of investing in real estate investment trusts is pretty clear.
To make the process more efficient: Focus on how to find the best REIT ETFs, rather than undertaking the complex and time-consuming process of researching individual names.
ETFs, or exchange-traded funds, are diversified baskets of assets. With a lot less homework and stress, you can effectively invest in a wide swath of these real estate stocks in a single holding.
How do you find the best REIT ETFs? Here are three suggestions:
Look for funds with $100 million or more in assets. There are occasionally good exchange-traded funds that aren't well-established, but they are exceptions.
Select a recognizable asset manager, with at least $100 million in total assets under management for the fund in question.
That figure might sound like a lot. But keep in mind that funds charge expenses well below 1%.
This means tiny funds either don't make a lot of money and are at risk of folding unexpectedly — or they're forced to overcharge investors to keep the lights on.
Find ETFs with expense ratios of 0.40% or less. This is your investment fee expressed as a percentage.
The math on this adds up to $40 per year on every $10,000 invested. Many funds charge less, but that should be your ceiling.
The average expense ratio of stock-focused ETFs is just 0.16% at present, and some of the best REIT ETFs come in under that bar.
It's OK to pay a bit more for a fund that's a better fit, but keep in mind that every penny in fees is a penny you don't pocket in profits.
Seek a yield of 2.5% or better. Income is a big feature of real estate investment trusts, so don't shortchange yourself when it comes to regular payouts.
The current yield of the S&P 500 Index as a whole is about 1.3% at present, and some of the best ETFs in the REIT space pay more than twice that.
Most investors considering the best REIT ETFs are typically diversified across more than 100 individual holdings in their portfolios, which include commercial real estate, residential housing, and even industrial park or specialized telecom REITs.
It would take a lot of know-how to build a portfolio like that on your own, as well as requiring an extensive amount of time to manage.
That's why many investors prefer REIT ETFs as their one-stop shopping destination.
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What are the largest REIT ETFs?
Here are the largest exchange-traded funds that primarily hold U.S. real estate investment trusts:
Vanguard Real Estate ETF (VNQ, $88.02): $34.1 billion in assets under management, 0.13% in annual expenses, 4.01% yield
Schwab U.S. REIT ETF (SCHH, $20.95): $7.4 billion in assets under management, 0.07% in annual expenses, 3.12% yield
Real Estate Select Sector SPDR Fund (XLRE, $40.82): $7.2 billion in assets under management, 0.08% in annual expenses, 3.33% yield
iShares U.S. Real Estate ETF (IYR, $93.23): $3.5 billion in assets under management, 0.39% in annual expenses, 2.52% yield
iShares Core U.S. REIT ETF (USRT, $55.47): $2.8 billion in assets under management, 0.08% in annual expenses, 2.79% yield
There are other REIT ETFs that might be a good fit for your personal portfolio.
It's also worth noting that there are international ETFs with a real estate tilt such as the Vanguard Global ex-US Real Est ETF (VNQI, $40.85), a well-established and affordable fund.
If you're interested in looking outside the domestic real estate market, these funds are worth exploring.
But, as with anything, the answer to what is the "best" is subjective. Finding the best REIT ETFs should involve a look at the size and cost of the funds, but you still have to explore the makeup of each fund to decide what fits best with your portfolio.
For more aggressive investors, that might mean an overseas REIT fund with huge dividends. For others, it could mean a more modest payday but a focus on well-established domestic leaders.
What's best for you will not be the best for your neighbor.
But for most investors, if you look at large REIT ETFs with an affordable expense ratio, you'll be on the right track.
Data is as of April 3.
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