By owning REITs, investors earn a portion of the profits without purchasing, managing, or financing physical property. In addition, market participants have historically favored real estate for its diversification characteristics, as these investments have low correlations with stocks or bonds.

REIT investors carefully consider dividend yields, as dividends are the primary motivation for investing in these assets. Dividend yields are shown as a percentage and are calculated by taking the annual dividend payment and dividing it by the stock price.

In general, the type of asset held by a REIT ETF will determine the risk profile of the fund and the payment of dividends.

Before investing in a REIT ETF, consider reviewing the fund’s prospectus to understand its investment strategy and the holdings it holds.

Top REIT ETFs

Below are some of the most popular REITs on the market. (Data as of June 15, 2021)

Vanguard Real Estate ETF (VNQ)

VNQ is the most popular REIT ETF. The fund tracks an index of companies involved in the ownership and operation of real estate properties across the United States.

Fund issuer: Vanguard

Five-year annual return: 8.6%

Dividend yield: 3.21%

Expense ratio: 0.12%

Assets under management: ~ $ 42 billion

IShares US Real Estate ETF (IYR)

IYR is one of the oldest REITs of REITs in existence. Similar to VNQ, the fund tracks an index of US companies directly or indirectly involved in the real estate sector.

Fund issuer: BlackRock

Five-year annual return: 9%

Dividend yield: 2.49%

Expense ratio: 0.42%

Assets under management: ~ $ 7 billion

SPDR Sector Select Real Estate Fund (XLRE)

XLRE is one of the key sectors that make up the S&P 500 Index. The fund invests in large capitalization real estate companies with operations in the United States.

Fund issuer: State Street Global Advisors

Five-year annual return: 11%

Dividend yield: 3.39%

Expense ratio: 0.12%

Assets under management: ~ $ 3 billion

IShares Global REIT ETF (REET)

REET tracks a global index of real estate companies operating in emerging and developed markets, including the United States.

Fund issuer: BlackRock

Five-year annual return: 6%

Dividend yield: 2.28%

Expense ratio: 0.14%

Assets under management: ~ $ 3 billion

JPMorgan BetaBuilders MSCI US REIT ETF (BBRE)

BBRE tracks an index of small, medium and large capitalization companies, primarily in commercial and specialty real estate across the United States.

Fund issuer: JPM

Five-year annual return: N / A (The fund was launched in 2018)

Dividend yield: 3.95%

Expense ratio: 0.11%

Assets under management: ~ $ 1.5 billion

What are REITs?

REITs invest in a range of real estate such as residential apartments, office buildings, hospitals, data centers, hotels, retail stores, etc. Companies that support these activities, such as financial lenders and management companies, are also part of the group.

Some REITs specialize in specific market areas such as mortgage financing, while others have diversified their investments into the real estate market. The risk profile of the REIT depends on the assets it holds.

To qualify as a REIT, a company must follow some requirements. One of these provisions is that the company must distribute to shareholders a minimum of 90 percent of its taxable income in dividends.

Most REITs fall into three categories: stocks, mortgages and hybrids.

Pros and Cons of Investing in REITs REITs

REIT ETFs provide a reliable stream of passive income to dividend investors without the hassle of owning or managing property. In addition, these funds are very liquid, so you can recover your capital at any time, which is not easy to achieve with physical real estate. In addition, REITs serve as a diversification tool in your portfolio, as they are less correlated with other asset classes like stocks.

On the flip side, REITs tend to be more volatile and are prone to rapid losses, a less visible feature in physical real estate. In addition, since REITs must return 90% of income to investors, they have less funds to pursue other investment opportunities. In addition, dividends from REITs are often taxed as regular income.

Despite these drawbacks, search by Nareit, a REIT firm, shows that the total return of REITs over the past 20 years has exceeded the performance of the Russell 1000 Large Cap Index by 2% (10.7% vs. 8.7%).

How to invest in REIT ETFs

A strong dividend strategy is an essential component of every investor’s portfolio. And when dividends are reinvested, the returns can be even higher.

When choosing REITs REITs, here are four steps to consider:

1. Determine your financial goals

The type of investment you choose depends on what you are trying to achieve. For example, someone about to retire should take a more cautious approach to investing. So always let your financial goals guide your decision making.

2. Look for REIT funds

When selecting REIT ETFs, pay attention to factors such as dividend history, dividend yield, fund performance, expense ratios, major holdings, and assets under management. Investors can find this information in a fund’s prospectus.

3. Describe your asset mix

Before investing, take an inventory of what you own and how you want to allocate your assets. Remember, the key is to stay diverse.

4. Know what you own

By periodically reviewing your investments, you can take charge of your finances and make the necessary adjustments. Take advantage of your broker’s free resources, like meeting with a financial planner, and always ask questions. Ultimately, investing without intervention does not exist.

Like any other investment, REITs REITs are susceptible to losses. However, the magnitude of potential losses is related to the level of risk contained in the portfolio. Thus, a fund that invests heavily in potentially riskier assets, such as highly leveraged real estate companies, will have a very different risk profile than a fund that invests in established and proven names.

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Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past performance of investment products is not a guarantee of future price appreciation.