Real estate investment trusts (REITs) are among the best tools that income investors have at their disposal. And REIT ETFs help take these tools to another level.
REITs are the most accessible way to invest in real estate, in both terms of cost (you just need the price of a share) and who’s allowed to own them in the first place (they’re not restricted to accredited investors). And they also help deliver the stream of consistent income that traditional physical real estate investors can generally expect.
But much like other parts of the stock market, there’s some risk involved in owning just one or two REITs. That’s where exchange-traded funds (ETFs) come in. A REIT ETF can help you defray that single-ticker risk by spreading your assets across dozens of REITs covering a variety of real estate industries.
Let’s look at some of the best REIT ETFs you can buy to bolster your portfolio income. I’ll start with an introduction to REITs and how they work, introduce you to some of the top REIT funds on the market, then answer a few question about REIT dividends, taxation, and more.
Disclaimer: This article does not constitute individualized investment advice. These funds appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
Table of Contents
What Is a REIT?
A real estate investment trust, often referred to as a REIT, is a unique class of investment made up of companies that own (and sometimes operate) real estate-related assets.
Congress created this business structure via the REIT Act, which itself was part of the Cigar Excise Tax Extension of 1960 that President Dwight D. Eisenhower signed into law. Their hope? To make real estate more accessible to everyday investors—after all, we don’t all exactly have the hundreds of thousands or millions of dollars necessary to buy apartment complexes and office buildings.
To help you understand real estate investment trusts a little better, let’s break down the terms that make up the name:
–“Real estate”: REITs must derive at least 75% of their gross income from real estate-related income, and 75% of their assets must be real estate-related assets. And if you wonder why I keep saying “related,” that’s because REITs don’t always have to own physical properties—they can own real-estate related assets such as mortgages, too.
–“Investment trust”: These words are important to understanding REIT ownership. There are certain thresholds that set REITs apart from conventional publicly traded company stocks. For instance, they must have at least 100 shareholders, and they can have no more than 50% ownership resting in the hands of five or fewer investors.
The most important (or at least pertinent) rule you need to know about REITs is that they must pay at least 90% of their taxable income to shareholders in the form of dividends.
Unsurprisingly, this mandate for income results in real estate often being the highest-yielding stock-market sector. Also unsurprisingly, high yields are among REITs’ biggest selling points.
Equity REITs vs. Mortgage REITs
The REIT universe is sometimes divided into two distinct flavors: equity REITs and mortgage REITs.
While they both deal in real estate, they’re two vastly different businesses and pretty dissimilar investments that can sometimes have very disparate reactions to the same outside forces.
In other words: Investors should know the difference between the two.
Equity REITs: What You Need to Know
“Equity” is shorthand for a few things, among them “ownership,” typically in a financial asset or company. You’ll frequently hear “equities” used as another term for “stocks,” as a company’s stock represents an ownership stake in that business.
Equity REITs, then, are directly invested in real estate assets. They own or manage properties ranging from office buildings to shopping centers to apartment complexes, leasing that space and generating income from the rents. And publicly traded equity REITs allow you to enjoy that exposure through their shares, which you can purchase through any traditional brokerage account.
Mortgage REITs: What You Need to Know
Mortgage REITs (or mREITs), on the other hand, don’t traffic in real estate properties—instead, they deal with debt.
Mortgage REITs finance real estate, operating less like a traditional REIT and more like a financial firm. This is done by either originating mortgages, or buying and selling those mortgages and related mortgage-backed securities. The business also commonly involves borrowing heavily to then trade all that mortgage paper at scale. An mREIT’s profits, then, tend to revolve around net interest income (NII): the difference between the interest revenue they generate and the financing costs on all their assets.
This fundamentally makes mortgage REITs riskier than equity REITs. After all, the 2008 financial crisis was caused in large part by financial firms borrowing heavily to invest in the debts of third parties. Particularly in the current interest rate environment, where borrowing is getting steadily more expensive all around, that’s a tough spot to be in.
That said, many mREITs offer twice or even thrice the income potential of equity REITs. These dividends might be at risk of evaporating if things go south, but if they hold up, investors will be richly rewarded for looking beyond the conventional players on Wall Street.
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Why Invest in REITs Through ETFs?
The big draw of an exchange-traded fund is that it allows you to diversify your portfolio across a multitude of different investments. You could spend a lot of time researching numerous stocks, then spending however much it costs to buy each stock individually … or you could buy a few dozen, hundreds, or even thousands all at once by owning a single ETF.
So, if you don’t want to take the time to research individual REITs, you can put your money into a REIT ETF and leave it up to the portfolio manager or the tracking index.
But real estate investment trusts’ portfolios typically are made up of dozens if not hundreds of properties or thousands of mortgages. So do you really need that additional layer of diversification?
REITs tend to be focused on specific corners of the market: office buildings, hotels, medical facilities, and so on. Even mortgage REITs tend to specialize in certain segments of real estate assets. If you want that specific exposure, individual REITs are just fine.
But if you want real estate income without your investment being tethered to any one real estate industry, REIT ETFs provide that broad-based access.
Related: The 10 Best Dividend Stocks to Buy
The Best REIT ETFs You Can Buy
The following funds are some of the best real estate investment trust ETFs on the market.
I’ve kept screening to a minimum here. All ETFs on this list have a Morningstar Medalist Rating (a forward-looking analytical view of the ETF) of either Bronze, Silver, or Gold, and at least $100 million in assets under management (AUM). I personally love brand-spanking-new funds, but targeting more established ETFs with a certain baseline of assets reduces your risk of purchasing a fund that might eventually close.
Past that, I’m just looking for REITs that come at the sector from different angles. It’s normal to see a sizable amount of overlap in REIT fund holdings—the sector itself only holds a couple hundred stocks across all market capitalizations, after all, and most are going to gravitate toward the largest components. Where the following funds differ is in their strategy and approach.
Related: 7 Best High-Yield Dividend Stocks: The Pros’ Picks
Best REIT ETF #1: Real Estate Select Sector SPDR Fund
–Assets under management: $7.8 billion
–Dividend yield: 3.3%
–Expense ratio: 0.08%, or 80¢ per year on every $1,000 invested
Let’s start with the Bronze-rated Real Estate Select Sector SPDR Fund (XLRE), which is one of the largest, cheapest, and simplest REIT ETFs you can buy.
XLRE—like the rest of State Street’s Select Sector SPDR Funds—focuses solely on its sector as represented within the S&P 500. So in this case, we’re looking at a portfolio of 31 predominantly large- and bigger mid-cap U.S. real estate investment trusts. That’s not an extremely deep portfolio, but SPDR funds rarely are; you’re getting some diversification, though, and you’re getting it across what in theory should be the sector’s most stable and resource-rich stocks.
From an industry perspective, you’re owning REITs positioned in health care, retail, industrial, residential, hotels, offices, and “more.” In fact, you’re mostly getting the “more”—”specialized REITs” (REITs that don’t fall within the traditional property types) make up the largest percentage of assets, at about 40%.
Like the S&P 500, XLRE is market cap-weighted, which means the larger the stock, the greater the percentage of assets invested in that stock. For instance, top holdings at the moment include medical facility and senior housing REIT Welltower (WELL), logistics specialist Prologis (PLD), and communications infrastructure play American Tower (AMT); those three stocks account for roughly a quarter of the fund’s assets right now.
REITs are frequently the best-paying market sector, and that’s evident in the Real Estate SPDR, whose 3%-plus dividend yield is nearly thrice what you’re getting out of the S&P 500.
This combination of large-cap real estate exposure, yield, and low costs makes XLRE one of the best REIT ETFs you can buy right now.
Want to learn more about XLRE? Check out the State Street Investment Management provider site.
Best REIT ETF #2: Vanguard Real Estate ETF
–Assets under management: $34.5 billion*
–Dividend yield: 3.8%
–Expense ratio: 0.13%, or $1.30 per year on every $1,000 invested
Vanguard Real Estate ETF (VNQ) is the 500-pound gorilla of the U.S. real estate space, boasting more than four times the assets of the second-largest largest ETF (the Schwab US REIT ETF, not discussed here) and a little more than that when compared to XLRE.
While you’d normally point to Vanguard’s low expenses as the reason, in this case, it’s the longevity. VNQ’s fees, while low compared to the entire field, are still higher than several of its closest competitors. But the fund has had a long time to build up its asset base—VNQ, which got its start in September 2024, is the ETF share class of Vanguard’s Real Estate Index Fund, which has been around since May 1996.
This Silver-rated fund tracks the MSCI US Investable Market Real Estate 25/50 Index, which invests in the real estate stocks of a much wider universe and weights them by market cap.
Related: The 10 Best-Rated Dividend Aristocrats Right Now
You won’t see much difference in top holdings—indeed, they share the same top 10 equity holdings, albeit in slightly different percentages. But VNQ’s portfolio of 154 stocks is far wider than XLRE. It also skews smaller than XLRE (though still large overall). Right now, VNQ has a roughly 25/50/25 blend of large-, mid-, and small-cap stocks; XLRE is currently 32/62/6.
The greater access to REITs outside the S&P 500 also currently helps to lift the yield, which sits near 4% right now.
* Vanguard fund assets are spread across multiple share classes, including mutual funds and ETFs alike. Assets listed for each fund in this story are for the ETF share class only.
Want to learn more about VNQ? Check out the Vanguard provider site.
Related: 11 Best Vanguard ETFs [Build a Low-Cost Portfolio]
Best REIT ETF #3: Invesco S&P 500 Equal Weight Real Estate ETF
–Assets under management: $110.8 million
–Dividend yield: 2.5%
–Expense ratio: 0.40%, or $4.00 per year on every $1,000 invested
Stop me if you’ve heard this one before: The Invesco S&P 500 Equal Weight Real Estate ETF (RSPR) holds all of the REITs in the S&P 500 Index.
This would be a true clone of the XLRE if not for its one, significant twist: equal weighting.
As I mentioned earlier, XLRE and VNQ distribute their assets based on the size of the company, which results in larger stocks having a greater influence over the fund’s performance. That’s not necessarily a bad thing. Larger companies tend to be more stable. Sometimes, those weighting systems result in still-modest allocations of 1% or 2% for even the largest stocks. And sometimes, the stocks in a sector can perform in lockstep to the point where not even perfectly even weight distribution would make a difference.
But the real estate sector is itself exposed to many different parts of the economy. And at least in the S&P 500, there is a high weighting concentration among the index’s biggest stocks—again, three of the XLRE’s 30 stocks (10%) account for 25% of the weight.
Related: The 7 Best Closed-End Funds (CEFs)
Invesco’s Silver-rated REIT ETF evens the playing board. Every quarter, the fund “rebalances” so that all of its components share the exact same weight. Yes, the weights will change over the next few months as stocks rise and fall, but every three months, the field is brought back to level. This obviously reduces the influence of larger REITs while amplifying the effect of moves in smaller REITs.
What has this meant, practically speaking? RSPR came to life in August 2015; but XLRE’s inception was in October 2015, so we don’t yet have 10-year returns data to work with. However, three- and five-year data is enough to tell us that the difference in strategies can be both helpful and a hindrance. RSPR has delivered a 9.9% average annual total return (price plus dividends) over the trailing five-year period, beating XLRE’s 7.4%. However, XLRE’s average annual total return of just more than 8.4% over the trailing three-year period bests RSPR’s return of just under 8.4%. Invesco’s fund also has a smaller yield.
So while Invesco S&P 500 Equal Weight Real Estate ETF certainly deserves a spot among the market’s best REIT ETFs, the decision to buy largely hinges on whether you want even exposure or want to let the sector’s biggest dogs do the most barking.
Want to learn more about RSPR? Check out the Invesco provider site.
Related: 6 Ways to Invest in Apartment Buildings [w/Minimal Effort!]
Best REIT ETF #4: JPMorgan BetaBuilders MSCI US REIT ETF
–Assets under management: $934.3 million
–Dividend yield: 3.0%
–Expense ratio: 0.11%, or $1.10 per year on every $1,000 invested
The JPMorgan BetaBuilders MSCI US REIT ETF (BBRE) offers a little more access to smaller REITs than Vanguard’s VNQ, and at a slightly lower cost.
The Bronze-rated BBRE tracks a custom, adjusted market cap-weighted index that emphasizes mid- and small-cap U.S. real estate equities. The fund holds about 120 stocks; a little less than a quarter of weight is allocated toward large-cap REITs; the biggest chunk (47%) belongs to mid-caps, and a sizable 30% is in smalls.
Related: Which Type of Real Estate Investment is Right for You? 8 to Know
The large-cap exposure still comes in big chunks; Welltower and Prologis are each weighted at more than 8% right now. But you start to see some differentiation in the top 10 holdings. Namely, gaming REIT VICI Properties (VICI), digital and paper management facility company Iron Mountain (IRM), and Extra Space Storage (EXR) don’t make the cut in the prior three funds, but they do in JPMorgan’s ETF.
You’re not getting a higher yield for the extra exposure to smaller stocks—BBRE pays less than XLRE and VNQ right now. But you are getting a better track record. JPMorgan’s BetaBuilders fund has out-returned both those funds over the trailing five years, and its three-year returns beat all three aforementioned ETFs. Those returns sit in the top 15% of all category funds for both periods, putting it among the market’s best REIT ETFs to buy.
Want to learn more about BBRE? Check out the JPMorgan provider site.
Do you want to get serious about saving and planning for retirement? Sign up for Retire With Riley, Young and the Invested’s free retirement planning newsletter.
Best REIT ETF #5: JPMorgan Realty Income ETF
–Assets under management: $455.6 million
–Dividend yield: 2.3%
–Expense ratio: 0.50%, or $5.00 per year on every $1,000 invested
The final REIT ETF on this list, JPMorgan Realty Income ETF (JPRE), is the most expensive by far and offers the lowest yield at just a few basis points north of 2%.
By ratings, however, it’s the best REIT ETF on this list, earning a Gold Medalist Rating from Morningstar. It’s also a solid performer, and most notably, it’s the only one that’s run by humans.
Managers Scott Blasdell, Jason Ko, and Nick Turchetta invest in REITs across the market-cap spectrum, seeking out “superior financial strength, operating revenues and attractive growth potential.” Their portfolio is tight at just 35 holdings, but it provides an even distribution of size, at 35% large caps, 39% mids, and 26% smalls. You’re still getting exposure to numerous REIT types, too, including health care, apartments, industrial, retail, and others.
Related: 9 Best Fidelity ETFs [Invest Tactically]
Many actively managed funds often share a lot of holdings in common with the index benchmarks they’re tasked with beating, but with a few twists. So indeed, while you have big weights in companies such as Welltower and American Tower that feature prominently in the index funds above, you also see outsized weights in the likes of health care and senior housing REIT Ventas (VTR), telecom infrastructure name SBA Communications (SBAC), and Host Hotels & Resorts (HST).
JPRE’s fee, while the highest on this list, is still competitive compared to the sector, and it’s buying a lot of expertise. Yes, the trio of managers cumulatively have just seven years with the fund (not much!), but they average 23 years of industry experience.
Trailing three- and five-year returns have been plenty respectable, sitting within the top third of all category funds.
Want to learn more about JPRE? Check out the JPMorgan provider site.
Related: Real Estate Syndication: What It Means and How to Invest
How Do REIT Dividends Work?
Real estate investment trusts pay dividends just like other companies—typically every quarter, though a few REITs are monthly dividend stocks.
The biggest difference between REIT dividends and other stocks’ dividends is that they’re “non-qualified.”
Whether a stock is “qualified” or “non-qualified” is determined by the IRS tax code. I won’t going deeply into the minutiae because it won’t be all that helpful. Instead, as a general guide, just know that most “traditional” stocks (the Apples and Coca-Colas of the world) pay qualified dividends, while most REITs pay non-qualified dividends.
Why does this matter?
Qualified dividends are taxed at the lower long-term capital gains tax rate (so, 0%, 15%, or 20%, plus the 3.8% net investment income tax, where applicable).
Non-qualified dividends don’t meet the IRS standards for qualification and are taxed at the higher short-term capital gains tax rate (aka your regular income tax rate).
How Do REIT ETFs Pay Investors?
When you own a REIT exchange-traded fund, you own parts of shares of various REITs with different payout schedules. However, you don’t get paid when those stocks pay out—you get paid based on the ETF’s payout schedule.
REIT ETFs pay their investors the same way as REITs do, with deposits appearing on your brokerage statement on a regular cycle. And they typically pay every quarter.
How Else Can You Buy Real Estate?
Typically, if you want to own stock in a real estate company, you have to invest through the public markets. But real estate crowdfunding makes it possible for everyday investors to secure a stake in privately held real estate businesses.
Real estate crowdfunding sites typically allow for small investments (read just hundreds or even tens of dollars) in a wide range of businesses. The platform is usually paid through either a monthly fee or by collecting a percentage of the funds raised for the business. And generally speaking, these platforms provide high ease of use compared to many other types of real estate investments.
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What’s better than a smart, sound dividend income strategy? How about a smart, sound dividend income strategy with very little money coming out of your pocket?
If that sounds good to you, you need look no farther than low-cost pioneer Vanguard, which offers up a number of payout-oriented products. Find out what you need to know in our list of five top-notch Vanguard dividend funds.
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