Real estate investment trusts (REITs) are companies that hold portfolios of real estate and related assets, such as office buildings, apartment complexes, and malls. Some REITs also earn money by lending money to others for the purchase of real estate property. REIT ETFs track indexes that consist of stocks of publicly traded REITs.
Why Investors Buy REIT ETFs
- Higher returns: Over time, REITs’ average annual returns have exceeded those of the S&P 500—from 2000–2013, REITs returned 11.7% on average each year while the S&P 500 returned 2.347%. That’s a significant difference. Looking back over a 30 year time horizon, those numbers are closer together, although REITs still outperformed the S&P 500 by over 100 basis points.
- Low correlation: In investing, the correlation between two types of investments refers to how closely those investments trade in tandem. For instance, the stocks of homebuilders and timber companies have a close correlation: as demand for new homes rises or falls, the demand for timber—and the price of timber stocks—tends to follow. REITs have historically shown a low correlation with the overall market—REITs tend to trade in tandem with stocks less than half of the time. This makes REITs a great way to reduce the risk of owning ETFs (or other investments) that typically mirror the performance of the S&P 500.
- High dividends: REITs tend to have a substantially higher dividend yield than that of the overall market.
- Hybrid nature: REITs are unique in that they offer both capital appreciation and yield. REITs are managed by companies that concentrate on actual property management the collection of rents (the majority of a fund’s income) with approximately 90% of an average REIT ETF’s taxable income being passed on to shareholders. REITs are a liquid way to invest in real estate, especially commercial property, while avoiding all of the drama of owning the actual property.
- Convenient access to “owning” real estate: Buying a REIT ETF gives you exposure to the overall real estate market without having to buy any actual property. That said, REIT share prices don’t always correlate to the performance of the overall real estate market. For instance, as housing prices fell in the past few years, REITs boomed, due in part to the rise in rents that resulted from the weak housing market.
Popular REIT ETFs
Currently, there are several REIT ETFs on the market, some tracking indexes of domestic REITs and some tracking indexes of international REITs. The dividend yields of these ETFs change often, so be sure to confirm the current yield before buying.