Real estate ETFs make investing in real estate easy: they invest in multiple real estate securities at once, and you don't have to worry about managing the physical properties.
Best performing real estate ETFs
iShares Home and Multi-Sector Real Estate ETF
Principal Real Estate Active Opportunities ETF
US Diversified Real Estate ETF
First Trust S&P REIT Index Fund
Source: Finviz. Data current as of July 2, 2024 and is for informational purposes only, not for trading purposes.
Why invest in real estate ETFs?
Real estate ETFs offer several benefits, including diversification, liquidity, and the potential for passive income. They may also act as a hedge against inflation amid stock market volatility.
Real estate is a well-known way to grow wealth, and real estate ETFs can make it easier to get into the real estate industry than buying traditional property.
Real Estate ETFs and REITs
A real estate ETF is an exchange-traded fund that invests in the real estate market. Real estate ETFs can be structured in a variety of ways, but most invest in real estate investment trusts (REITs).
REITs are companies that own (and often operate) real estate properties such as apartments, warehouses, hotels, etc. Many REITs have a history of paying dividends.
REITs buy and manage real estate, while REIT ETFs invest in REIT shares. The advantage of a REIT ETF over a regular REIT is that investing in a REIT ETF gives you multiple REITs for one, similar to investing in an index fund made up of many stocks instead of one stock.
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Pros and Cons of Real Estate ETFs
Strong Points
Protection against inflation: In times of high inflation, real estate acts as a hedge against rising prices. Since property rents tend to rise at the same time as other prices, rising rents protect the purchasing power of your money.
Diversification: When you invest in rental properties, not only do you have to manage the property, but you also risk losing your investment if something happens to the property. A real estate ETF invests in multiple companies that own real estate. If something happens to one of the properties you invest in, you're backed up by the others.
Income: REITs are required to pay out at least 90% of their income as dividends. Because real estate ETFs invest primarily in REITs, they tend to offer higher dividends.
Liquidity: ETFs can be bought and sold at any time during the trading day, just like stocks. Real estate ETFs also benefit from this liquidity, whereas traditional real estate does not.
Cons
Exposed to interest rates: Because real estate ETFs' underlying assets are real estate, these ETFs can be exposed to rising interest rates. When interest rates rise, as they have over the past year, it becomes more expensive to borrow money to build or buy a home. For example, mortgage applications are declining as 30-year fixed mortgage rates have risen to 6.52%, the highest since mid-2008.[0].
Potential capital gains taxes: Dividends paid by real estate ETFs may be treated as taxable income. Investing through a Roth IRA can help you avoid these taxes as dividends grow tax-free if reinvested.
For more information on sector ETFs, see below.
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The authors and editors had no involvement in the aforementioned investments at the time of publication.