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Investing in REIT ETFs

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Real estate has been a great vehicle for increasing wealth. According to Forbes, real estate was the primary wealth-creating vehicle for 215 of the world’s 2,755 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). And 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.

Image source: Getty Images.

Top REIT ETFs

Congress created REITs in 1960 to allow the average investor 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, which REITs must distribute to their shareholders via dividend payments. 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 more than 200 publicly traded REITs focused on a dozen property sectors, it can be challenging for beginning investors to know where to start. That’s where ETFs can help. These entities hold several REITs and other real estate stocks, giving investors broad exposure to the sector. Some of the top real estate ETF options are:  

Top REIT ETFs

Ticker Symbol

Performance (Total Returns) Over the Past 12 Months

Inception Date

Issuer

Assets Under Management (AUM)

Vanguard Real Estate ETF

(NYSEMKT:VNQ)

30.5%

9/23/2004

The Vanguard Group

$83.3 billion

iShares U.S. Real Estate ETF

(NYSEMKT:IYR)

28.1%

6/12/2000

BlackRock (NYSE:BLK)

$7.3 billion

Schwab U.S. REIT ETF

(NYSEMKT:SCHH)

29%

1/13/2011

Charles Schwab (NYSE:SCHW)

$6.2 billion

Real Estate Select SPDR Fund

(NYSEMKT:XLRE)

27.7%

10/7/2015

SSGA Funds Management, Inc.

$4.3 billion

iShares Cohen & Steers REIT ETF

(NYSEMKT:ICF)

27.3%

1/29/2001

BlackRock

$2.4 billion

Data source: Company websites and YCharts. Performance and AUM data as of Oct. 3, 2021.

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

Vanguard Real Estate ETF

The Vanguard Real Estate ETF is a behemoth among REIT ETFs, with more than 10 times the assets under management of its nearest competitor. It invests in REITs and other real estate stocks. At the end of August 2021, the ETF held 171 stocks, led by the following five:

  1. Vanguard Real Estate II Index Fund: 11.5% of the portfolio.
  2. American Tower (NYSE:AMT): 7.5%.
  3. Prologis (NYSE:PLD): 5.6%.
  4. Crown Castle International (NYSE:CCI): 4.7%.
  5. Equinix (NASDAQ:EQIX): 4.2%.

This broad REIT ETF offers investors two forms of diversification. Of its more than 170 stocks, its largest holding is a related REIT index that holds shares of 169 REITs and real estate stocks. Meanwhile, its top 10 holdings include the biggest REITs by market cap. Overall, its 10 largest holdings make up 45.6% 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 0.12%, it’s more than 50% below the industry average of 0.28%. That enables investors to keep more of their returns, which has helped this ETF outperform others focused on REITs over the past year. 

iShares U.S. Real Estate ETF

The iShares U.S. Real Estate ETF invests in domestic real estate stocks and REITs. This ETF had 83 stock holdings as of late 2021, led by the following five:

  1. American Tower: 8.9%
  2. Prologis: 6.4%. 
  3. Crown Castle: 6.1%.
  4. Equinix: 4.6%. 
  5. Public Storage (NYSE:PSA): 3.4%. 

Those are the five biggest REITs and operate across several property types, including industrial, communications infrastructure, data centers, and self-storage. Overall, the ETF’s 10 largest holdings make up 43.2% of its portfolio, providing investors with slightly less diversification than Vanguard’s ETF, given that it has half the number of stocks.

One of the downfalls of this REIT ETF is its expense ratio. At 0.42%, it’s well above the industry average. Because of that, it has slightly underperformed its benchmark over the years as the higher fee has eaten into its returns.

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 141 REITs in the fund as of late 2021, led by the following five:

  1. American Tower: 8.8%
  2. Prologis: 6.3%. 
  3. Crown Castle: 6%.
  4. Equinix: 4.6%. 
  5. Public Storage: 3.3%.

Like many other REIT ETFs, the Schwab US REIT ETF holds REITs based on their market cap instead of an equal weighting system. Thus, it has nearly identical top holdings as most other REIT ETFs. Meanwhile, its top 10 make up 42.3% 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.

Real Estate Select SPDR Fund

The Real Estate Select SPDR Fund allows investors to make a more direct investment in real estate. This ETF only holds REITs in the S&P 500 Index, which limits its investment pool. As of late 2021, this ETF held only 29 REITs, led by some familiar names: 

  1. American Tower: 12.8%
  2. Prologis: 9.8%.
  3. Crown Castle: 7.9%.
  4. Equinix: 7.5%.
  5. Public Storage: 4.8%.

As the five largest REITs, it’s no surprise to see this group leading the way. Further, because this ETF concentrates only on REITs in the S&P 500, its top 10 holdings made up 62.7% of its portfolio. That makes it an ideal option for investors seeking to focus on the largest REITs.

This ETF has a low expense ratio of 0.12%. Consequently, it’s a solid option for investors seeking low-cost exposure to the biggest REITs.

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. This ETF focuses on holding 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. Equinix: 8.4%.
  2. American Tower: 8.2%
  3. Crown Castle: 8%.
  4. Prologis: 7.8%.
  5. Public Storage: 5.5%.

Overall, its top 10 holdings made up 60.4% of its portfolio as of late 2021.

Because this ETF takes a more active approach to invest in REITs, it charges a relatively higher expense ratio of 0.34%. It’s best for investors who want to focus on the dominant REITs without limiting themselves to only those in the S&P 500. 

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. Meanwhile, ETFs make it easy to invest in the sector by providing investors with broad exposure to the leading REITs. While most REIT ETFs have similar holdings, all of the top ones offer their own unique spin, giving investors several excellent options.