This is a guest contribution by Rick Orford
Are you looking for the best REIT ETFs in 2021? With interest rates at historical rock bottom levels, investors increasingly look to REITs to provide a more attractive dividend than bonds. Moreover, REIT ETFs offer further diversification by holding a basket of REITs to reduce portfolio risk. Further, dividend income is a key for those wanting to learn how to become financially independent.
For this article, we sifted through hundreds of real estate ETFs. Then, we sorted the ETFs chose unique REIT ETFs that contain the most assets.
What is an ETF?
Exchange-traded funds, or ETFs, are funds that hold stocks and perhaps other ETFs. Indeed, investors would be forgiven if they thought a Mutual Fund does the same. However, unlike a mutual fund, ETFs are traded on the secondary market (I.e., instantly traded) rather than directly with the mutual fund company. Further, investors who buy and sell ETFs get the advantage of having the trade settled when they buy or sell. Summing it up, one could say that an ETF is a fund that trades like a stock.
ETFs can hold assets such as stocks, other ETFs, foreign currencies, and even commodities such as gold. While most ETFs attempt to replicate the performance of an index such as the S&P 500 or Nasdaq, many others serve other purposes.
You can see a list of the best Dividend ETFs here.
Passive Managed ETFs
Passively managed ETFs are the most common type of ETF. The fund manager chooses a basket of assets such as individual REITs and rebalances automatically once or twice a year. These types of ETF’s often seek to replicate an Index’s performance, like the Dow Jones U.S. REIT Index that tracks the performance of U.S. REITs.
Also, due (in part) to its turnover, expense ratios are often low.
Active Managed ETFs
Investors who choose Actively Managed ETFs so do because they seek higher than average returns. But it comes at a cost. Indeed, actively managed ETFs have higher expense ratios (they cost more) because a manager spends more time managing the portfolio. However, the returns have the potential of beating the index. For this article, all the REIT ETFs are actively managed.
What’s a REIT?
A REIT is also known as a Real Estate Investment Trust. It’s a publicly traded company that owns, operates, or finances income-producing assets involving real estate. The most common REITs involve real estate properties that generate revenue from rents – think apartment buildings.
You can see Sure Dividend’s full REIT list here.
I’d forgive an investor who thinks a REIT is a dividend stock. REITs trade on the secondary market like stocks do, and they pay dividends as many stocks do. However, unlike typical publicly traded companies like Pepsico (PEP), REITs must distribute at least 90% of their income to investors. And, investors must remember the income is net of expenses to operate the business. As a result, investors would receive less money than managing the same properties themselves. But that’s a trade-off REIT investors are happy to make.
REIT Risks
REITs often use leverage to grow. In other words, like most Americans who buy homes using mortgages, so do REITs when they purchase income-producing properties. Of course, REITs will borrow significantly more than the average single-family home. Furthermore, REITs will often borrow on a variable interest basis. As a result, REITs usually pay less interest when mortgage rates drop. And similarly, REITs will pay more interest when mortgage rates increase.
Historically, mortgage rates drop when the FED needs to improve the economy, as in March 2020 during the COVID-19 crisis. And, mortgage rates rise when the economy is doing well. One crucial question investors ask when investing in a REIT is: “Does the REIT have enough demand?”. In other words, is vacancy going to be a risk? Unfortunately, the answer might not be clear as the REIT ETF might invest in hundreds of REITs.
Are REITs A Good Investment?
REITs allow investors to participate in a specific real estate market without holding and managing the real estate directly. Putting it differently, if I wanted to own apartment buildings, I could either buy the apartment buildings and manage them on my own or buy a REIT or REIT ETF that offers exposure to apartment buildings.
Investors may not make as much money with the REIT or the ETF as owning the assets directly. However, REITs are more attractive to investors than those wanting to own the underlying real estate. To be sure, while the risks are similar, it’s much less work owning the REIT / REIT ETF.
What’s a REIT ETF?
REIT ETFs offer diversification and reduce portfolio risk by investing assets in many different REITs. This way, the portfolio should mitigate a single REITs disappointing news, should it come.
Furthermore, REIT ETFs can be leveraged, offering investors a potential 2x or 3x return on an index. And other types include “bull” or “bear,” which profits when REITS either go up or down in value. For example, a 3x Bear REIT ETF aims to produce the investor 3x the returns in a falling market. However, due to their risks, we intentionally left out these types of over-leveraged ETFs.
REIT taxation
REIT taxation isn’t as straightforward as owning a stock. REITs avoid paying corporate tax by distributing 90%+ of their income to investors. As a result, the tax burden passes to the investor.
Investors who receive income from REITs are getting a combination of income, short and long-term capital gains (and losses), and non-qualified dividends. As a result, it may be better to hold REITs and REIT ETFs in tax-sheltered accounts to ease the burden.
However, those who chose to hold REITs and REIT ETFs in taxable accounts can rest assured they will get a 1099-DIV and 8937 forms that account for all the income.
What Are the Best REIT ETFs?
Now that you’ve read through the background on REITs and REIT ETFs, I’ll cover the Best REIT ETFs. In this list, I’ll evaluate the following:
- Is the dividend safe? – How likely will they continue to pay?
- Does the dividend grow? – A stagnant dividend could mean a stagnant business.
- How long has the ETF been in business? – Longevity is security.
- Total assets are invested? – More assets mean additional market participation.
- When does the dividend pay? – Annually? Semi-Annually? Or Monthly?
- Is it liquid – Can you quickly sell the REIT ETF?
- Costs – Are the management fees low?
The Cheat Sheet
- Vanguard Real Estate ETF (VNQ)
- Vanguard Global ex-U.S. Real Estate ETF (VNQI)
- Global X Data Center REITs & Digital Infrastructure ETF (VPN)
- Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
- SPDR DJ Wilshire Global Real Estate ETF (RWO)
Vanguard Real Estate ETF (VNQ)
The Vanguard Real Estate is an ETF that invests in real estate investment trusts that purchase office buildings, hotels, and other real estate property. The goal is to track the MSCI US Investable Market Real Estate 25/50 Index, designed to capture the large, mid, and small-cap segments of the U.S. equity universe.
With 174 holdings, this is the biggest REIT on the list, with assets exceeding $63.9 Billion and a low expense ratio of just 0.12%. It’s no wonder that VNQ is a popular choice among investors. Some of VNQ’s top holdings include:
- Vanguard Real Estate II Index Fund
- American Tower Corp.
- Prologis Inc.
- Crown Castle International Corp.
- Equinix Inc.
Notably, 0% of the holdings are international.
Why do we like VNQ?
The Vanguard Real Estate ETF offers highly liquid security that provides exposure to a broad range of U.S. real estate classes. With a competitive dividend yield of 3.79% and a 5-year return of 7.16% annually, VNQ is one of the best REIT ETFs investors can choose.
Vanguard Global ex-U.S. Real Estate ETF (VNQI)
The Vanguard Global ex-U.S. Estate is an ETF that invests in real estate investment trusts that purchases REITS in 30 countries other than the U.S. The goal is to offer investors exposure to a broad range of international real estate and mimic the S&P Global Ex U.S. Property NR USD performance.
With 679 holdings, assets exceeding $5.8 Billion, a 5-year return of 6.79% annually, and a low expense ratio of just 0.12%, VNQI could be ideal for investors seeking international real estate exposure.
Some of VNQI’s top holdings include:
- Vonovia SE
- Sun Hung Kai Properties Ltd.
- Mitsubishi Estate Co. Ltd.
- Mitsui Fudosan Co. Ltd.
- Goodman Group
Notably, none of the holdings are U.S.based.
Why do we like VNQI?
Vanguard Global ex-U.S. Real Estate ETF offers investors international exposure to real estate. Simultaneously, the dividend yield is currently 0.92%, and we feel this has some room to grow.
Global X Data Center REITs & Digital Infrastructure ETF (VPN)
Investors looking to capitalize on the internet’s growth can look to the newly created Global X Data Center REIT & Digital Infrastructure ETF. Indeed, VPN invests in property that houses the servers that power the internet (Datacenters) and other digital infrastructure. And thanks to the COVID-19 pandemic forcing just about everyone to work from home, it’s no surprise that data centers were the best performing REIT sector in 2020.
VPN currently has $25 Million in assets and invests in 25 different REITs. Their top holdings include:
- Crown Castle Intl Corp.
- American Tower Corp.
- Equinix Inc.
- Digital Realty Trust Inc.
- SBC Communications Corp.
Why do we like it?
Datacenter space is near recession-proof. The current SEC Yield on VPN is 1.49%. However, we feel VPN could offer investors significant gains over the long term.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
The Pacer Benchmark Industrial REIT ETF is another newcomer to the ETF world. Incepted 5/14/2018, INDS offers investors a rules-based approach that attempts to replicate the Benchmark Industrial Real Estate SCTR Index.
INDS has $170 Million in 18 assets and charges a competitive 0.6% expense ratio. As of 12/31/2020, this ETF has 78.04% of its assets in Industrial REITs and 21.96% in Warehouse REITs.
The top holdings include:
- Duke Realty Corp.
- Prologis Inc.
- Americold Realty Trust Inc.
- First Industrial Realty Trust Inc.
- Stag Industrial Inc.
Why do we like it?
The Pacer Benchmark Industrial REIT ETF offers investors exposure to industrial and warehouse properties that are part of the e-commerce distribution.
“Thanks to the rapid growth of e-commerce due to online shopping, industrial REITs outperformed the market by 4.1%.” — Indexology Blog
Since its inception, INDS has grown 18.86% annually, and its one-year return is an impressive 12.60%. While the dividend yield is just 3.29%, we feel there could be room to grow.
SPDR DJ Wilshire Global Real Estate ETF (RWO)
The SPDR DJ Wilshire Global Real Estate ETF seeks to replicate the Dow Jones Global Select Real Estate Securities Index’s total return performance. Indeed, this REIT ETF holds a diversified mix of assets in the U.S. and abroad.
RWO currently has $1.6 Billion in assets and manages them at a competitive 0.50% fee. Further, the top five holdings include:
- Prologis Inc.
- Digital Realty Trust Inc.
- Public Storage
- Simon Property Group Inc.
- Welltower Inc.
Why do we like it?
The 5-year return is 4.10% and offers a 3.16% quarterly dividend.
Final Thoughts on The Best REIT ETFs
Finding the best REIT ETF for your portfolio comes down to what diversification you’re seeking. Investors who buy a combination of VNQ and VNQI can say, “I have real estate in my portfolio,” and they’d be right. That combination offers broad, international diversification that would be impractical to reproduce. However, those looking to pick a sector to outperform the overall real estate sector need only look at a more specialized REIT ETF.
Disclaimer: Dividend yields are courtesy of Yahoo Finance as of 03/23/2021. All other data is current as of 02/28/2021. The author is a holder of AMT.
