Income-producing commercial real estate is one of the best asset classes an investor can own. Commercial real estate can provide a high and growing income stream, an exceptional potential for capital gains and possible tax advantages. Unfortunately, most individual investors can’t afford to buy commercial property like apartment buildings, warehouses, self-storage facilities and shopping malls. Direct ownership of industrial or commercial property is simply out of reach for most people.
A REIT is a specialized company that invests its capital in income-generating real estate or interest-bearing real estate derivatives such as commercial mortgages. REITs that own and manage properties directly are called equity REITs. REITs that hold mortgages and other financial instruments are called mortgage REITs, or mREITs.
Since their introduction, REITs have become tremendously popular. Today, there are more than 200 publicly traded REITs on the market, representing hundreds of billions of dollars in market capitalization. With all those choices, the REIT landscape can be confusing for investors looking for dividend income and long-term capital appreciation.
In response, Wall Street asset management firms have created a large selection of REIT-focused exchange traded funds, or ETFs, for retail and institutional investors to choose from. REIT ETFs offer professional management and wide-ranging diversification in convenient securities that trade on major stock exchanges.
Here’s a list of seven high-quality REIT ETFs income-oriented investors should buy today and hold through 2024 and beyond:
| REIT ETF | Expense Ratio | Trailing-12-month Dividend Yield* |
| Schwab U.S. REIT ETF (ticker: SCHH) | 0.07% | 3.4% |
| Vanguard Real Estate ETF (VNQ) | 0.12% | 4.1% |
| Invesco Active U.S. Real Estate Fund (PSR) | 0.35% | 3.1% |
| VanEck Mortgage REIT Income ETF (MORT) | 0.43% | 12.9% |
| SPDR Dow Jones International Real Estate ETF (RWX) | 0.59% | 4.3% |
| iShares Global REIT ETF (REET) | 0.14% | 3.4% |
| iShares Cohen & Steers REIT ETF (ICF) | 0.33% | 2.8% |
Schwab U.S. REIT ETF (SCHH)
With $6.4 billion in net assets, the first REIT ETF on the list is also one of the largest and most prominent. SCHH is a passively managed index ETF based on the Dow Jones Equity All REIT Capped Index.
SCHH does not hold any mREITS or hybrid REITs (hybrid REITs invest in both equity REITs and mREITs). The objective of the fund is to replicate the performance of the underlying index after accounting for fees and expenses. Because the fund is passively managed to mirror the index, the 0.07% expense ratio is low. In other words, SCHH is a low-cost ETF.
Just over 10% of the fund’s assets are invested in shares of Prologis Inc. (PLD), which owns and leases high-tech facilities like data centers and server farms. Another 7% is invested in American Tower Corp. (AMT), which leases cell phone and 5G communication towers to mobile phone providers.
Vanguard Real Estate ETF (VNQ)
VNQ is another REIT index ETF well worth considering. VNQ mirrors the MSCI US Investable Market Real Estate 25/50 index. That index, and therefore the fund, is made up of more than 160 U.S. publicly traded REITS.
The fund is well diversified among classes of commercial real estate but, notably, more than 20% of this ETF is invested in REITs that serve the computer, data and communications services industries. This relatively large allocation to high technology should serve shareholders well going forward. The fund is also fairly heavily invested in self-storage, health care, retail and warehouse REITs.
In terms of assets, VNQ is quite large but the 0.12% expense ratio is reasonable. Investors can expect the fund to closely track the performance of the underlying index.
Invesco Active U.S. Real Estate Fund (PSR)
As its name implies, PSR is an actively managed REIT ETF. It’s interesting to note, however, that the fund does choose all of its REIT investments from the FTSE NAREIT All Equity REIT index.
The management team at Invesco uses quantitative analysis to screen all the companies in the index to determine which of them have the greatest potential for income and growth over the long term. The REITs that score highest on their tests are included in PSR.
PSR considers itself a total return fund, which means it concentrates as much on dividend income as it does on capital appreciation potential. Portfolio managers constantly monitor the fund but generally only make changes monthly.
The fund’s expense ratio stands at 0.35%, which is higher than investors might expect for an index fund but is in line for an actively managed quantitative fund like PSR.
VanEck Mortgage REIT Income ETF (MORT)
Investors seeking a superior dividend yield from an mREIT will be hard-pressed to do better than MORT.
MORT is an mREIT ETF with a special focus on high income. It has a solid opportunity for growth over time, but capital appreciation is secondary to superior income.
MORT tracks the MVIS U.S. Mortgage REIT index, which is designed to represent the general performance of the entire mREIT sector of the REIT universe. The fund seeks to achieve its objectives by buying and holding residential mortgage-backed securities, or RMBS, as well as commercial mortgage-backed securities, called CMBS. CMBS and RMBS are pools of individual mortgages that Wall Street investment bankers have securitized and packaged into bonds.
About 14% of the fund’s assets are invested in Annaly Capital Management Inc. (NLY). NLY is an interesting REIT because it generates significant revenue from a mortgage servicing business it owns as well as from the mortgages and loans it holds.
The fund’s expense ratio of 0.43% is somewhat higher than other ETFs on our list but those expenses are made up for by the high income shareholders will enjoy.
SPDR Dow Jones International Real Estate ETF (RWX)
RWX is an international REIT ETF. This means that the fund is not appropriate for everyone, but could be perfect for investors who are looking to diversify their portfolios by gaining exposure to real estate companies that own property outside of the U.S.
RWX is designed to replicate the performance of the Dow Jones Global ex-U.S. Select Real Estate Securities Index. That benchmark is interesting because it is not strictly cap-weighted. Instead, it uses a float-adjusted market cap method to make allocation decisions.
The holdings within the index and in RWX are reviewed quarterly, but large-scale changes are not frequent. Investors should also know that RWX excludes mREITs and hybrid REITs from the portfolio.
Again, this ETF is not suitable for very conservative investors, but for those who can bear the risks of global investing, this $291 million can be an excellent choice.
iShares Global REIT ETF (REET)
REET is an ETF that looks to take advantage of real estate opportunities in emerging markets and developing countries. As such, REET is not for the faint of heart of the risk-averse.
REET tracks the FTSE EPRA NARIET Global Net Total Return Index. That name may sound like a mouthful but the objective of the index and of REET is straightforward: to earn income and enjoy the growth potential inherent in developing markets around the world.
REET is not to be considered a core real estate holding, but the fund appears on this list because including it in a portfolio is a great way to diversify holdings and take advantage of an important but often neglected sector of the commercial real estate market.
The fund boasts $3.5 billion in net assets and a low expense ratio of 0.14%.
iShares Cohen & Steers REIT ETF (ICF)
ICF is a $2 billion REIT ETF designed to closely track one of the most well-known indexes in the real estate industry: the Cohen & Steers Realty Majors Index. The fund’s expense ratio is 0.33%, but other than that, investors should see performance that otherwise mirrors the index.
The fund invests in REITs that the experts at Cohen & Steers consider to be dominant players in their respective real estate classes. Extra Space Storage Inc. (EXR), a major player in the self-storage arena, and Simon Property Group, Inc. (SPG), one of the most prominent retail REITs, are prime examples of the kinds of companies ICF holds.
The market capitalizations of the REITs inside ICF range from large- to mid-cap. All holdings have good trading volume and provide the fund with ample liquidity. Because it concentrates on REITs that continue to show dominance in their respective classes, ICF can be considered a core REIT ETF holding.
