Is it better to invest in a REIT or REIT ETF?
However, the returns of REIT ETFs may be lower than investing in individual REITs that have the potential to provide higher returns. Investing in individual REITs can also provide the opportunity to invest in properties with higher potential returns, but it also comes with higher risk.
REIT ETFs are a great way to diversify your portfolio and gain exposure to the real estate market. By investing in a diversified portfolio of REIT ETFs, you can reduce risk and increase returns over the long term.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.
REIT ETFs are passively managed and designed to mirror REIT indexes. These ETFs tend to be “top-heavy,” where the largest REITs make up a greater weighting. Investing in REITs through a REIT ETF is a way for shareholders to engage with this sector without needing to personally contend with its complexities.
REITs should generally be considered long-term investments
This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.
They historically offer competitive long-term performance, with consistent returns compared to stocks and bonds. REITs provide attractive income through dividends, liquidity, transparency, and diversification, enhancing risk-adjusted returns.
Summary of Why Investors May Not Want to Invest in REITs
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
Because you're smart, you may be asking yourself, What happens if the short-term interest rate goes up? Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money.
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
What is the 90% rule for REITs?
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
There are three major risks of investing in REITs: Sensitivity to interest rate changes, vulnerability to real estate trends, and management risk. Like other investments in an income portfolio, REITs are sensitive to changes in interest rates.
REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with a steady income and, if held long-term, growth that reflects the appreciation of the property it owns.
- iShares Core US REIT ETF.
- Real Estate Select Sector SPDR®
- Schwab US REIT ETF™
- Invesco S&P 500® Equal Wt Real Estt ETF.
- iShares Cohen & Steers REIT ETF.
- Fidelity MSCI Real Estate ETF.
- Vanguard Real Estate ETF.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
No investment is without risk, and REITs can and do go bankrupt – so it's important to do your own research. One downside of these investments is that, due to the rigid structure of the dividend pay-outs, it can be difficult for the companies to reinvest much capital back into the business.
Investors can buy and sell shares of public REITs at any time during trading hours. With private REITs, on the other hand, investors may have to wait for a redemption event, which can occur quarterly or annually, before they can cash out their investment. Additionally, private REITs may charge redemption fees.
April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.
Is Vanguard REIT good?
Vanguard Real Estate Index: Performance Highlights
Solid contributions from specialized REITs powered returns over that span, but the fund's very low costs are its true edge. All share classes rank in the U.S. real estate peer group's cheapest decile, and low turnover equates to few transaction costs.
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
Alternative assets, like REITs, can potentially help investors balance out a portfolio that is heavy on stocks and bonds. They may even enhance returns. But investors must be sure that they understand the inherent risks of REITs and limit their exposure according to their unique financial profile.
