REIT ETF List: Earn Regular Income from These Real Estate ETFs

Best REIT ETFs for 2017

Real estate investment trusts, or REITs, have been an income investor favorite for decades. They are backed by real estate and can have dividend yields well above the stock market average. There are also exchange-traded funds (ETFs) that specialize in REITs. For investors that are looking for the best REIT ETFs for 2017, here is a comprehensive list of exchange-traded funds that provide investors exposure to the real estate sector.

A REIT is a company that owns or finances income-producing real estate. The have been around for over five decades. REITs were created when President Eisenhower signed into law the REIT Act contained in the Cigar Excise Tax Extension of 1960. The creation of REITs gave regular investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate.

REIT ETFs are investment funds that hold shares of real estate investment trusts. They are traded on stock exchanges, so investors can buy and sell them just as they would with regular stocks.

Best REIT ETF Yield

One of the reasons to consider REIT ETFs is their handsome dividend yields. Dividends don’t seem to play as an important role in current stock market investing as they did before. However, many real estate investment trusts still have decent yields. This is because to qualify as a REIT, a company must pay at least 90% of its taxable income in the form of dividends to shareholders every year. As investment funds that hold shares of these real estate companies, REIT ETFs have been paying sizable dividends to investors too.

In the U.S., there are approximately 1,100 companies registered as real estate investment trusts. The number of REIT ETFs, of course, is much smaller. Below is a comprehensive list of REIT ETFs trading in the U.S. stock market.

REIT ETF List

Diversified REIT ETFs

One of the most important things in real estate investing is diversifying. That’s why many real estate investment trusts own tens, if not hundreds of properties. Still, a REIT may choose to diversify only within its segment, such as a healthcare REIT owning 20 healthcare properties but nothing else. Therefore, when it comes to exchange-traded funds, it’s important for income investors to consider diversified REIT ETFs.

There are many diversified REIT ETFs trading in the stock market. Vanguard REIT ETF (NYSEARCA:VNQ), iShares U.S. Real Estate ETF (NYSEARCA:IYR), and SPDR Dow Jones REIT ETF (NYSEARCA:RWR) are well-known names in the diversified REIT ETF segment.

Residential REIT ETFs

Residential properties should be a familiar type of real estate for most people simply because everyone needs a place to live. For investors looking for exposure to residential REITs, here is a residential REIT ETF: iShares Reisdential Real Estate Capped ETF (NYSEARCA:REZ).

Mortgage REIT ETFs

In general, there are two types of REITs: equity REITs and mortgage REITs. Equity REITs invest in and own properties, while mortgage REITs invest in mortgages and mortgage-backed securities. Mortgage REITs make money by earning income from the interest on its mortgage investments. Investors interested in mortgage REIT ETFs should check out iShares Mortgage Real Estate Capped ETF (NYSEARCA:REM) and VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT).

Monthly Dividend REIT ETFs

In today’s stock market, most dividend stocks distribute on a quarterly basis. For investors that need their portfolio’s dividends to cover monthly expenses, a dividend payment every three months may not be frequent enough. Fortunately, there are stocks with monthly distributions, and a lot of them happen to be in the real estate sector.

The idea is that tenants typically pay rent on a monthly basis. As giant landlords, some real estate investment trusts have decided to distribute some of the rent they collect every month to investors. As a matter of fact, quite a few of the top real estate stocks pay monthly dividends.

This nature of the real estate business can also be seen in exchange-traded funds. While most REIT ETFs pay quarterly dividends, some distribute on a monthly basis. For instance, PowerShares KBW Prem Yield Equity REIT (NASDAQ:KBWY) is a monthly dividend REIT ETF that is based on the KBW NASDAQ Premium Yield Equity REIT Index. Investors looking for high dividend yield REIT ETFs should take a look at this fund. (Source: “KBWY – PowerShares KBW Premium Yield Equity REIT Portfolio,” Invesco Distributors Inc, last accessed May 1, 2017.)

Healthcare REIT ETFs

Healthcare REITs have been another income investor favorite. The number-one reason to consider this sector is its potential to provide recession-proof income. Think about it; when the economy enters a downturn and businesses are struggling, some retail shops may close, but those that are in need of medical attention will most likely still go see a doctor.

Healthcare REITs invest in medical properties, skilled nursing facilities, assisted living facilities, and other types of healthcare properties. Because of the inelastic demand for their tenants, healthcare operators, healthcare REITs can be solid investments for income investors.

Many diversified REIT ETFs hold healthcare REITs in their portfolios, but there is also a healthcare REIT pure play ETF: the Janus Long-Term Care ETF (NASDAQ:OLD). The Janus Long-Term Care ETF seeks to track the investment results of the Solactive Long-Term Care Index. (Source: “OLD-The Long-Term Care ETF,” Janus International Holding LLC, last accessed May 1, 2017.)

Leveraged REIT ETFs

If you look at the prospectus of the REIT ETFs trading in today’s market, you would see that a lot of them are tracking specific indices. But what if an investor is not satisfied with just the index return?

Well, there are also things called leveraged ETFs. These ETFs utilize leverage through the use of derivative products. With leverage, they can amplify the returns of an underlying index. There are leveraged ETFs that specialize in the real estate sector.

For instance, ProShares Ultra Real Estate ETF (NYSE:URE) seeks to track the investment results of two times the daily performance of the Dow Jones Real Estate Index. So if the index returns one percent for the day, URE ETF should in theory return two percent (before fees and expenses). (Source: “Ultra Real Estate,” ProShares, last accessed May 1, 2017.)

While leveraged ETFs can amplify the gains in an underlying index, they can also amplify the losses when things go south. Moreover, leveraged ETFs also tend to charge much higher fees compared to non-leveraged ones. They might be suitable for someone who wants chase an index’s short-term momentum. But for long-term income investors, leveraged ETFs may not be the safest option.

Short-Term REIT ETFs

Interest rate risk is one of the things REIT investors should keep in mind. When interest rate rises, REITs that use debt to purchase properties will see their interest expense increase. This could impact their profitability.

There is one REIT ETF that’s designed to mitigate the impact of interest rate movements. NuShares Short-Term RETI ETF (BATS:NURE) is an ETF that tracks the Dow Jones U.S. Select Short-Term REIT Index. It focuses on investing in U.S. REITs with short-term lease agreements. Typically, REITs with such agreements are less volatile and sensitive to interest rate changes than long-term REITs. (Source: “NuShares Short-Term REIT ETF,” Nuveen, last accessed May 1, 2017.)

Global REIT ETFs

Most of the diversified REIT ETFs trading in the U.S. stock exchanges hold REITs that invest in properties located in North America. However, there are also REIT ETFs that can help investors collect rent from tenants in other parts of the world; these are global REIT ETFs.

Some global REIT ETFs focus on the global ex-U.S. market, such as the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI), which tracks the S&P Global ex-U.S. Property Index and gives investors exposure to real estate stocks in over 30 countries. And then there are also REIT ETFs that specialize in one region or country, such as the WisdomTree Japan Hedged Real Estate Fund (NYSEARCA:DXJR), which holds nearly 100 real estate stocks in Japan.

One thing to keep in mind when investing in global REIT ETFs is currency risk. Fortunately, there are global real estate ETFs that hedge their currency exposure. For instance, DXJR ETF hedges its exposure to fluctuations between the U.S. dollar and the Japanese yen.

Final Thoughts On REIT ETFs

One thing to keep in mind is that there could be a lot of overlapping between the holdings of different types of REIT ETFs. For instance, a diversified REIT ETF may hold some healthcare REITs that are also found in the holdings of a specialized healthcare REIT ETF. Likewise, a monthly dividend REIT ETF may hold high-yielding names that are also included in the portfolio of a residential REIT ETF.

Therefore, when an investor wants to diversify their portfolio by investing in different types of REIT ETFs, they should not only look at the ETF’s type, but also see what stocks each ETF holds.

Don’t forget that ETFs charge a fee. While the annual management expense ratio for many of the names listed above are below one percent, those fees could add up over time. For investors interested in REIT ETFs, it’s important to know the investment goals, holdings, distributions, fees, and risks of these funds before taking out their wallet.