Real estate investing is notorious for using leverage. That means a buyer of real estate can borrow most of the value of a property and reap the income from the entire property, even though he or she only put part of the money into it.
Real estate ETFs are not like that. Investors buy shares and get paid dividend distributions and reap a total return based only the amount they have invested. The tradeoff for this is that there is lower risk. A real estate ETF invests in several real estate companies at once, whereas the individual buying a property is betting on just that one property. In addition, because an investor does not have to borrow funds to pay for the real estate, there is no debt to pay back.
The following ETFs are instruments that investors may consider to get into real estate without having to be a landlord or becoming a partner in an investment group. We chose the top 5 real estate exchange-traded funds (ETFs) based on assets under management (AUM) as of August 15, 2017.
They are listed below from largest to smallest. We evaluated the investment approaches of each fund so that investors can make comparisons of style and results. (See also: 4 Real Estate Trends for 2017 Investors Should Be Aware Of.)
1. Vanguard REIT ETF (VNQ)
The primary goal of VNQ is high income. Investors may also see growth in the value of their investment, but that is secondary. The fund tracks an index that measures the performance of real estate investment trusts (REITs).
The specific stocks of the REITs are part of the MSCI US REIT Index. The holdings in the ETF are weighted in a manner that is similar to the weightings in the index. (See also: 4 Risks of Shorting REIT ETFs.)
- Avg. Volume: 3,644,438
- Net Assets: $64.59 billion
- PE Ratio (TTM): 7.52
- Yield: 4.38%
- YTD Return: 3.82%
- Expense Ratio (net): 0.12%
2. iShares U.S. Real Estate ETF (IYR)
Investors in IYR seek results similar to those of the Dow Jones U.S. Real Estate Index. The fund invests mostly in REITs and attempts to keep 90% of its assets in securities that are in the index. The companies represented by those securities may be large-cap, mid-cap or small-cap.
The percentage of assets in any particular size of company is dependent on the underlying index. Money managers may change the mix of holdings to more closely reflect the performance of the benchmark.
- Avg. Volume: 6,404,896
- Net Assets: $4.2 billion
- PE Ratio (TTM): 6.84
- Yield: 4.01%
- YTD Return: 6.79%
- Expense Ratio (net): 0.44%
3. iShares Cohen & Steers REIT ETF (ICF)
This fund seeks results similar to the Cohen & Steers Realty Majors Index. REITs are the components of the index, and the fund invests at least 90% of its assets in those REITs, or in depositary receipts representing the REITs. The fund looks for companies that may be acquired or that may acquire other companies as part of the consolidation of the real estate sector.
- Avg. Volume: 158,536
- Net Assets: $3.27 billion
- PE Ratio (TTM): 12.96
- Yield: 3.82%
- YTD Return: 4.10%
- Expense Ratio (net): 0.34%
4. Schwab U.S. REIT ETF (SCHH)
SCHH invests in REITs from the Dow Jones U.S. Select REIT Index, but may invest in assets that are not included in the index. Among the REITs that are part of the index, the fund assigns weights that are similar to the weightings in the index.
- Avg. Volume: 437,425
- Net Assets: $3.57 billion
- PE Ratio (TTM): N/A
- Yield: 2.61%
- YTD Return: 2.14%
- Expense Ratio (net): 0.07%
5. SPDR Dow Jones REIT ETF (RWR)
RWR uses the Dow Jones U.S. Select REIT Index as its benchmark. Money managers attempt to invest in securities whose valuation is closely tied to each company’s actual real estate holdings, and avoids companies that are valued based on considerations other than their real estate.
- Avg. Volume: 163,755
- Net Assets: $3 billion
- PE Ratio (TTM): N/A
- Yield: 3.95%
- YTD Return: 2.00%
- Expense Ratio (net): 0.25%
Investors do not have to raise large down payments to get into real estate. The ETFs listed above offer investors an opportunity to participate in the real estate market without debt, down payments, rent collections or property marketing.
The REITS themselves hold numerous properties, and the fund holds numerous REITs, so investors are protected from losses due to any one property failure.