Investing in REIT ETFs

Real estate has been a great vehicle for increasing wealth. According to Forbes, real estate has been the primary wealth-creating vehicle for 25 of the country's top 400 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). 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 anyone 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 almost 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:

Here's a closer look at these top REIT ETFs.

Our list

Vanguard Real Estate ETF

The Vanguard Real Estate ETF is a behemoth among REIT ETFs, with more than five times the assets under management of its nearest competitor. It invests in REITs and other real estate stocks. In mid-2024, the ETF held about 150 real estate stocks, led by the following five:

1. Vanguard Real Estate II Index Fund: 13.4% of the portfolio
2. Prologis (PLD -0.31%): 6.7%
3. American Tower (AMT -0.77%): 5.9%
4. Equinix (EQIX 0.13%): 4.5%
5. Welltower (WELL 0.13%): 3.8%

This broad REIT ETF offers investors several forms of diversification. Of its more than 150 stocks, its largest holding is a related REIT index fund that also holds shares of more than 150 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 (Prologis), the top infrastructure REIT (American Tower), the leading data center REIT (Equinix), and the biggest healthcare REIT (Welltower). That gives investors some diversification across property types.

Overall, its 10 largest holdings make up almost 50% 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 0.13%, it's far less than the industry average of 1.07% of similar funds. That enables investors to keep more of their returns.

That includes the REIT ETF's enticing dividend yield of around 3.6%.

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 about 70 stock holdings as of mid-2024, led by the following five:

1. Prologis: 8.3%
2. American Tower: 7.3%
3. Equinix: 5.8%
4. Welltower: 4.5%.
5. Digital Realty Trust (DLR 1.31%): 4.0%.

Those are the five of the 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 47% 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 0.40%, it's well above the industry average, so it has slightly underperformed its benchmark over the years as the higher fee has eaten into its returns.

The higher fee also eats into the REIT ETF's 3.1% dividend yield.

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 almost 120 REITs in the fund as of mid-2024, led by the following five:

1. American Tower: 9.4%
2. Prologis: 7.3%. 
3. Equinix: 4.6%. 
4. Welltower: 4.2%.
5. Simon Property Group (SPG 0.22%): 4.2%.

Like many other REIT ETFs, the Schwab fund holds REITs based on their market cap instead of using an equal weighting system, so it has nearly identical top holdings as most other top REIT ETFs. Meanwhile, its top 10 make up almost 47% 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. That includes their lucrative dividend income (3.9% dividend yield).

Real Estate Select SPDR Fund

The Real Estate Select SPDR Fund allows investors to make a more direct investment in real estate. The ETF only holds REITs in the S&P 500 index, which limits its investment pool. As of mid-2024, this ETF held only 31 REITs, led by some familiar names:

1. Prologis: 10.9%.
2. American Tower: 9.5%.
3. Equinix: 7.3%.
4. Welltower: 6.1%.
5. Digital Realty Trust: 4.8%.

As the five largest REITs, it's no surprise to see this group leading the way. And because this ETF concentrates only on REITs in the S&P 500, its top 10 holdings made up more than 60% of its portfolio. That makes it an ideal option for investors seeking to focus on the largest REITs.

The ETF has a low expense ratio of 0.09%. Consequently, it's a solid option for investors seeking low-cost exposure to the biggest REITs. They pay attractive dividends, which drives the REIT ETF's roughly 3.3% dividend yield.

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, focusing on 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:

1. American Tower: 8.1%
2. Prologis: 8.0%.
3. Equinix: 7.1%.
4. Welltower: 6.8%.
5. Simon Property Group: 5.4%.

Overall, its top 10 holdings made up 58% of its portfolio as of mid-2024.

Because the ETF takes a more active approach to investing in REITs, it charges a relatively higher expense ratio of 0.33%. It also offered a lower dividend yield (2.7%). 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.

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