REITs are typically used for diversification and/or income generation in long-term investment portfolios. Below we’ll check out the best REIT ETFs to get exposure to the real estate market in 2021.
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In a hurry? Here’s the list:
- VNQ – Vanguard Real Estate ETF
- VNQI – Vanguard Global ex-U.S. Real Estate ETF
- SCHH – Schwab U.S. REIT ETF
- USRT – iShares Core U.S. REIT ETF
- REZ – iShares Residential Real Estate ETF
Introduction – Why REITs?
Real Estate Investment Trusts, or REITs for short, are an efficient and effective way to get exposure to the real estate market to diversify one’s investment portfolio without buying physical property. Better yet, REIT ETFs provide broad exposure to national and international commercial and residential real estate markets by pooling investor capital and diversifying their real estate buys, thereby allowing investors to avoid the idiosyncratic risks of local real estate markets inherent with owning property.
REIT portfolios can include apartment complexes, data centers, hospitals, hotels, cell towers, office buildings, retail spaces, warehouses, and more. REITs may offer a diversification benefit to long-term investment portfolios by being lowly correlated to both stocks and bonds. REITs are also popular among income investors as they typically have a high dividend yield. REITs are required to generate 75% of their income from real estate investments, and are also required to distribute 90% of that income to shareholders, hence their high yields that income investors love. In doing so, REITs aren’t subject to corporate income tax on those profits.
REIT ETFs provide cheap and easy access to that diversification and dividend yield. Let’s explore the best REIT ETFs.
The 5 Best REIT ETFs
Below are the 5 best REIT ETFs:
VNQ – Vanguard Real Estate ETF
The Vanguard Real Estate Index Fund (VNQ) is far and away the most popular REIT ETF out there, with over $50 billion in assets. The fund seeks to track the MSCI US Investable Market Real Estate 25/50 Index, providing broad exposure to the U.S. real estate market. This ETF has over 180 holdings and an expense ratio of 0.12%.
VNQI – Vanguard Global ex-U.S. Real Estate ETF
To diversify globally with REITs, the Vanguard Global ex-U.S. Real Estate ETF (VNQI) provides exposure to international (ex-US) REITs. The fund tracks the S&P Global ex-U.S. Property Index, providing exposure to REITs in over 30 countries around the world. This ETF has over 640 holdings and an expense ratio of 0.12%.
SCHH – Schwab U.S. REIT ETF
Another low-fee option for U.S. REITs is from Schwab – the Schwab U.S. REIT ETF (SCHH). This is the cheapest ETF on the list with an expense ratio of 0.07%. This ETF seeks to track the Dow Jones Equity All REIT Capped Index, excluding mortgage REITs.
USRT – iShares Core U.S. REIT ETF
The iShares Core U.S. REIT ETF (USRT) seeks to track the FTSE NAREIT Equity REITs Index. The fund was established in 2007 and has an expense ratio of 0.08%.
REZ – iShares Residential Real Estate ETF
All the preceding REIT ETFs hold mostly commercial real estate. To specifically target residential, healthcare, and public storage REITs, the iShares Residential Real Estate ETF (REZ) is a great choice. This ETF seeks to track the FTSE NAREIT All Residential Capped Index and has an expense ratio of 0.48%.
Where to Buy These REIT ETFs
All these REIT ETFs should be available at any major broker. My choice is M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
I actually created this REIT pie for M1 Finance that provides roughly 50/50 exposure to commercial and residential REITs, since again most of the REIT ETFs above are dominated by commercial REITs, which have underperformed residential REITs historically.
Investors outside the U.S. can find these ETFs on eToro.
Disclosures: I am long VNQ.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.