The best REIT ETFs for 2021
Interest rates have been pushed to near-zero levels, turning investors in the direction of higher-yielding asset classes. Real estate investment trust exchange-traded funds, or REIT ETFs, offer many benefits to a fixed-income portfolio such as capital appreciation and a stable source of dividend income. REIT ETFs are alternative investments that can protect against inflation. These income-generating investments can offer higher returns without compromising investment risk. Holding REIT ETFs can be an affordable and low-risk strategy for investors to diversify their holdings without the hassle of owning actual properties. Andrew Rosen, president of Diversified in Wilmington, Delaware, recommends considering liquidity, costs and management when shopping around for these types of funds. Here are seven REIT ETFs to consider.
Vanguard Real Estate ETF (ticker: VNQ)
The Vanguard Real Estate ETF offers investors a wide range of exposure to real estate investments, with an affordable expense ratio of 0.12%. The portfolio is composed of different property types to spread risk from industrial to residential and health care REITs. "The easiest way to get broad exposure to the sector is to buy a general REIT, which owns a mix of all types of REITs/property types. This can be secured through Vanguard's VNQ," says Thomas Hayes, chairman and managing member at Great Hill Capital in New York City. This fund consists of 180 different equity REITs that add diversification to your portfolio. Top holdings include American Tower Corp. (AMT), Prologis (PLD) and Crown Castle International Corp. (CCI), and each of these holdings represent at least 5% of the fund.
VanEck Vectors Mortgage REIT Income ETF (MORT)
While equity REITs invest in income-producing real estate, mortgage REITs, or mREITs, invest in mortgages and mortgage-backed securities (MBS), which generate income through interest. Yields from mREITs tend to have higher earning potential than equity REITs. This VanEck mREIT ETF currently yields about 8%. Since mREITs are financed through debt, investors look at the spread between the asset's debt expense and the mortgage yield. Hayes says mREITs benefit from wider spreads between their borrowing costs and the yield on the mortgages/MBS. "With the yield curve now at its steepest in several years, this is a good time for mortgage REITS," he explains. Investors should be aware that mREITs hold interest-rate risk. As interest rates rise, they become less attractive to investors. But Hayes says that shouldn't be a problem in the foreseeable future, as Federal Reserve chairman Jerome Powell vowed to keep short-term rates low in the coming years. "The outlook is promising for this asset class," he says.
iShares U.S. Real Estate ETF (IYR)
One of the leading real estate ETFs on the market is the iShares U.S. Real Estate ETF. IYR, which was established in 2000, consists of more than 80 holdings and, similar to VNQ, covers the big REIT names. That said, this fund has a higher expense ratio at 0.42%. While there is overlap in many of the funds' holdings, one of the differences is the varying weightings of different assets in each fund. Both ETFs cover a wide range of different REITs, which can help manage volatility. VNQ may be more cost-effective, but IYR's three-year cumulative total return is 16.3%, while VNQ's three-year cumulative total return is slightly lower at 15.6%.
Global X Data Center REITs & Digital Infrastructure ETF (VPN)
This fund should appeal to investors who want balanced exposure to some of the most notable names in data center stocks, like Equinix (EQIX) and Digital Realty (DLR). Investments that back tech infrastructure like data center REITs have the potential for high market growth this year. As our reliance on technology has accelerated in our digital marketplace, there is greater demand for digital frameworks that support 5G technology and wireless communication networks. Cue in VPN, a REIT ETF that "seeks to invest in companies that operate data center REITs and other digital infrastructure supporting the growth of communication networks," according to Global X. This new fund, launched in October 2020, carries an expense ratio of 0.5%, and the ETF offers a combo of generating income from real estate assets and growth from the tech sector. VPN's return since inception is about 3.6%.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
Industrial REITs are companies that own and manage properties used for storage, manufacturing and distribution of goods. This has been a profitable sector as e-commerce businesses have become a convenient and efficient way to shop -- giving rise to the need for more warehouses and fulfillment centers for businesses' goods. Considering the demand for these properties, profitability and risk of default are not immediate concerns, a key advantage of industrial REITs. Patrick Carroll, CEO and founder of CARROLL, a national real estate investment and management company, says the pandemic created dramatic shifts in the demand for commercial real estate. "As the world stayed home, the demand for warehouse space and data centers began to soar due to the increase of people ordering items to their homes," he explains. "This resulted in a higher need to store and ship the products, and more demand for the technologies that service these industries."
Schwab U.S. REIT ETF (SCHH)
SCHH is a hybrid of both equity and mREITs, with a low expense ratio of 0.07%. What's unique about this REIT ETF is its structure: No company's weight in the index can be more than 10%, and the combined weight of companies that have a weighting of more than 4.5% cannot be more than 22.5%. There are more than 140 total holdings, and the fund has a weighted average market cap of nearly $34 billion. The top 10 holdings in the portfolio make up more than 40% of the fund. SCHH has a mix of subsector weightings like specialized REITs at 43.5%, commercial REITs at 41.7% and residential REITs at 13.9%, to name a few. SCHH has a yield of nearly 3%.
U.S. Diversified Real Estate ETF (PPTY)
PPTY offers diversification for real estate investors. Its core property types include residential, office and industrial REITs. Investors who choose this REIT ETF value diversity in property type and location, prime considerations when investing in real estate. This fund is a multicap ETF that holds companies of varying market caps, which can help manage volatility. PPTY focuses on companies with strong balance sheets and reduces its allocation to companies that hold a high amount of debt. The fund was created in 2018 and has a total return of 27.4% since its inception. PPTY carries a 0.49% expense ratio.
Consider these REIT ETFs:
-- Vanguard Real Estate ETF (VNQ)
-- VanEck Vectors Mortgage REIT Income ETF (MORT)
-- iShares U.S. Real Estate ETF (IYR)
-- Global X Data Center Reits & Digital Infrastructure ETF (VPN)
-- Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
-- Schwab U.S. REIT ETF (SCHH)
-- U.S. Diversified real estate ETF (PPTY)
Paulina Likos is an investing reporter at U.S. News & World Report, covering investing and asset management. Before beginning her career as an investing reporter, Paulina graduated from Villanova University where she studied political science, communication and business management. Out of college, Paulina spent several years as a risk manager at Fannie Mae, predicting and reducing credit risk for the company.
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