Managing a rental property is often the dream route to establishing a steady stream of passive income. But the reality of being a landlord is far from just cashing rent checks every month.
For those who desire a simpler way to invest in real estate — real estate investment trusts present an appealing alternative.
“REITs enable investors to gain all the benefits of commercial real estate without owning, managing or financing it,” says Abby McCarthy, senior vice president of investment affairs at Nareit.
But picking individual REITs can be challenging. To simplify the process, we screened for the best REIT ETFs based on management style, expense ratios, yields, assets under management, geographical focus, diversification and performance.
Best REIT ETFs
- Vanguard Real Estate ETF (VNQ).
- Schwab U.S. REIT ETF (SCHH).
- The Real Estate Select Sector SPDR Fund (XLRE).
- iShares Core U.S. REIT ETF (USRT).
- SPDR Dow Jones REIT ETF (RWR).
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Vanguard Real Estate ETF (VNQ)
What you should know
A popular broad real estate ETF is VNQ, which tracks the MSCI US Investable Market Real Estate 25/50 Index. By doing so, the ETF provides exposure to U.S.-listed REITs and includes real estate development, operating companies and real estate service companies. As a result, its portfolio is quite broad, with around 160 holdings. Because VNQ is weighted by market capitalization, it tends to be quite top-heavy, with Prologis Inc. (PLD) alone accounting for around 7% of the ETF’s portfolio as of Jan. 2.
Pros and cons
Pros
- Low 0.12% expense ratio.
- Broad diversification across most REIT subsectors.
- Low portfolio turnover rate of 7.5%.
Cons
- Includes non-REIT real estate sector stocks.
- Top-heavy portfolio concentration.
- Occasionally pays a return of capital.
More details
12-month return as of Feb. 1: 11.79%.
Schwab U.S. REIT ETF (SCHH)
Expense ratio
0.07%
Total assets
$6.3 billion
What you should know
By tracking the Dow Jones Equity All REIT Capped Index, SCHH provides exposure to more than 120 REITs. This index excludes real estate sector companies that are not classified as REITs, such as real estate service companies. It also omits mortgage REITs and hybrid REITs. Compared to Vanguard Real Estate ETF, SCHH has a slightly less top-heavy portfolio, with the top-holding Prologis only accounting for around 9.5% of the ETF’s weight as of early January.
Pros and cons
Pros
- Low 0.07% expense ratio.
- Low portfolio turnover rate.
- Index has a REIT-only focus.
Cons
- Has historically underperformed Vanguard’s VNQ.
- Lower yield compared to other REITs.
- Lower AUM.
More details
12-month return as of Feb. 1: 11.21%.
The Real Estate Select Sector SPDR Fund (XLRE)
Expense ratio
0.09%
Total assets
$5.8 billion
What you should know
As one of State Street’s 11 Select Sector ETFs, XLRE allows investors to target stocks from a particular sector. Specifically, XLRE tracks the Real Estate Select Sector Index, which provides exposure to about 30 REITs and real estate management and development companies. Like Schwab U.S. REIT ETF, the ETF also excludes mortgage REITs.
Pros and cons
Pros
- Low 0.10% expense ratio.
- Benefits from brand name.
- Liquid with high trading volume and low bid-ask spread.
Cons
- Top-heavy portfolio concentration.
- Smaller portfolio of around 30 holdings.
- Includes some non-REIT real estate stocks.
More details
12-month return as of Feb. 1: 12.37%.
SPDR Dow Jones REIT ETF (RWR)
Expense ratio
0.25%
Total assets
$1.4 billion
What you should know
Investors looking to avoid small amounts of non-REIT real estate sector stocks in the Real Estate Select Sector SPDR Fund can do so via the SPDR Dow Jones REIT ETF. This ETF has operated since April 2001 and currently tracks the Dow Jones U.S. Select REIT Index. So, the focus is on companies that own or operate real estate and are governed by the REIT Act of 1960. Currently, RWR is composed of more than 100 market-cap-weighted holdings, again with Prologis sitting at the top with an over 12% weight.
Pros and cons
Pros
- Fairly high yield.
- Does not include non-REIT real estate companies.
- Diversified across most REIT subsectors.
Cons
- Higher 0.25% expense ratio.
- Has historically underperformed State Street’s XLRE.
- Lower AUM.
More details
12-month return as of Feb. 1: 13.78%.
Compare the REIT ETFs
| FUND (TICKER) | EXPENSE RATIO | TOTAL ASSETS | 12-MONTH ANNUALIZED RETURN AS OF FEB. 1 |
|---|---|---|---|
Vanguard Real Estate ETF (VNQ) | 0.12% | $32.9 billion | 11.79% |
Schwab U.S. REIT ETF (SCHH) | 0.07% | $6.3 billion | 11.21% |
The Real Estate Select Sector SPDR Fund (XLRE) | 0.09% | $5.8 billion | 12.37% |
iShares Core U.S. REIT ETF (USRT) | 0.08% | $2.3 billion | 13.67% |
SPDR Dow Jones REIT ETF (RWR) | 0.25% | $1.4 billion | 13.78% |
iShares Cohen & Steers REIT ETF (ICF) | 0.33% | $2.1 billion | 10.39% |
Methodology
Our curated rankings of the top REIT ETFs were created by screening funds for several must-have metrics:
AUM: All the selected REIT ETFs currently have at least $1 billion in assets under management. A higher AUM indicates greater investor confidence and interest in an ETF.
Expense ratio: To be eligible for this ranking, a REIT ETF must have a net expense ratio of 0.35% or lower. All else being equal, a lower expense ratio means higher net returns for ETF investors.
Management style: All REIT ETFs on this list are passively managed by tracking a benchmark index. None of them may actively pick stocks or utilize derivatives.
Geographical focus: This ranking only focuses on ETFs that hold REITs listed on North American equities exchanges.
Diversification: Funds that only hold a narrow subsector of REITs, such as residential, industrial or mortgage REITs only were excluded.
Track record: Each REIT ETF on this list has at least a five-year track record of past performance to assess.
Yield: All selected REIT ETFs have a trailing 12-month yield of at least 2.5% to ensure higher-than-average income potential. It is important to note that a REIT ETF’s yield can fluctuate, especially as its share price changes.
These criteria helped us identify REIT ETFs that are well-capitalized, have a long track record, provide a higher yield than the market and are managed passively with low fees.
An experienced ETF analyst selected the funds above, but they may not be right for your portfolio. Before purchasing any of these funds, do plenty of research to ensure they align with your financial goals and risk tolerance.
Why other funds didn’t make the cut
We began our rankings by excluding actively managed REIT ETFs. While actively managed REIT ETFs have their uses, such as income or hedging, evidence suggests that the overwhelming majority of these funds tend to underperform their benchmark index over the long term.
The rationale for this decision was based on the latest results of the S&P Indices Versus Active, or SPIVA Scorecard from S&P Dow Jones Indices.
We also elected to cap expense ratios at 0.35%. All else being equal, REIT ETFs with a lower expense ratio will generally track their benchmark index tighter over time and suffer less drag from fees, thus enhancing performance.
To ensure that our selection focused on REIT ETFs with economies of scale, we set a lower limit of $1 billion in AUM and a five-year track record. This helped us identify reliable and time-tested REIT ETFs that were not only sizable but also had a proven track record of performance and management expertise.
To ensure diversification, our rankings also required eligible REIT ETFs to hold a variety of holdings from multiple REIT subsectors, such as a mixture of retail, office and health care REITs. Therefore, we excluded REIT ETFs with a narrow focus, such as those only invested in mortgage, industrial or residential REITs.
By doing so, we aimed to provide options that offer a broader representation of the real estate market, thus potentially reducing sector-specific risks and increasing the likelihood of more stable returns over time.
Finally, we ensured that all REIT ETFs included in the rankings paid a trailing 12-month yield of 2.5% or greater. This criterion was important because many investors turn to REITs specifically for their income-generating potential.
By setting a yield floor of 2.5%, we aimed to feature ETFs that not only offer the possibility of capital appreciation but also provide a level of income that exceeds what the broad equity market offers.
Final verdict
Investing in a REIT ETF offers a way to gain exposure to real estate markets while enjoying income potential and long-term capital appreciation. They are particularly beneficial for diversifying an investment portfolio that may be skewed towards equities or other asset classes.
Our pick for the best REIT-focused ETF is the Schwab U.S. REIT ETF (SCHH). With its low expense ratio of 0.07% and minimal portfolio turnover of just 6%, this ETF is a cost-effective way to indirectly invest in real estate.
Additionally, it offers a decent 12-month yield of 3.8%, making it attractive for those seeking income. Its focus on REITs allows investors to tap into the real estate market without exposure to real estate companies that don’t own or operate properties.
How to invest in REITs
Investing in REITs is a process quite similar to investing in equities or ETFs. First, you’ll need to identify the REIT you are interested in by searching for its ticker symbol.
Once you’ve done your research and have chosen a specific REIT, you’ll go to your brokerage account and enter an order. When entering the order, you’ll specify the number of shares you want to buy and the type of order you’re placing —such as a market order, which buys at the current market price, or a limit order, which sets a specific price at which you’re willing to buy.
When your order is executed, you’ll own shares of the REIT and become eligible for its distributions, which are typically paid out on a quarterly or monthly basis, depending on the specific REIT.
You have the option of either withdrawing these distributions as income or reinvesting them to buy more shares of the REIT, thereby benefiting from the power of compounding.
Related: Best online brokerages.
Are REIT ETFs a good long-term investment?
The suitability of REIT ETFs as long-term investments varies from investor to investor based on their risk tolerance, objectives and investment time horizon.
On the positive side, REIT ETFs offer an avenue for portfolio diversification, as REITs have historically had a lower correlation with other asset classes such as stocks and bonds. Historically, they have also offered competitive returns when compared to equities.
Moreover, investing in a REIT ETF can be a more affordable avenue for exposure to real estate compared with buying properties directly. It can also offer an income stream as the underlying REITs are required to distribute a high percentage of their income as dividends.
But there are several risks prospective long-term investors need to consider. REITs can be volatile investments, sometimes more so than the broader stock market, which could be concerning for risk-averse investors wary of times like the 2008 financial crisis.
As an asset class, REITs are also sensitive to interest rate fluctuations; a rise in interest rates can hurt property values and, by extension, the value of the REIT ETF. Sector-specific risks also come into play, such as property devaluation, tenant vacancies and changes in rent, all of which can adversely affect the returns of a REIT ETF.
Finally, from a tax perspective, the distributions paid by REIT ETFs may not qualify for the lower tax rates applicable to some other types of dividends and might be taxed as regular income. Adding to these costs are expense ratios charged by the managers of the REIT ETF.
Frequently asked questions (FAQs)
Whether REIT ETFs are worth it depends largely on your risk tolerance, investment objectives and financial situation.
Generally speaking, these types of funds can be a worthy investment for those who can tolerate equity-like volatility and wish to gain exposure to the real estate market without the need to directly buy or manage physical properties.
To that point, REIT ETFs can be worth it for individuals who want to diversify their portfolio by adding a real estate component but prefer the liquidity and simplicity of a brokerage account, along with the potential for higher-than-average income.
When evaluating different REIT ETFs, examining the underlying index and holdings is a good starting point. Pay close attention to the weightings and how much the ETF allocates to each REIT subsector, such as retail, office, or residential properties. This will give you an idea of the fund’s diversification and exposure to different market conditions.
Another important factor is the expense ratio, as higher fees can eat into your returns over time. All else being equal, REIT ETFs with lower expense ratios are expected to lag their benchmark index less over time.
To understand the risk involved, looking at the ETF’s historical volatility is also valuable. Often, you can find this information through metrics like beta, which measures the fund’s sensitivity to market movements, and standard deviation, which quantifies the fund’s historical volatility in terms of how much the returns have fluctuated on average over a specific period.
Finally, consider the reputation and expertise of the fund manager. A manager with a well-established track record, high assets under management and expertise in the real estate field can be a strong indicator of a well-run REIT ETF.
Whether 2024 will be a good time to invest in REIT ETFs amounts to market timing, a strategy generally considered risky and often ineffective over the long term. There’s no foolproof way to predict what the market will do in the near or far future.
For long-term investors interested in REITs, the timing of when to invest may matter less than other factors like how consistently you invest, whether you remain invested during bear markets and crashes, and the quality of the REIT ETF you choose.
So, while it’s tempting to seek a good time to invest in REIT ETFs, the broader perspective would be to focus on your long-term goals, investment strategy and risk tolerance rather than attempting to time the market.
