First published on June 8th, 2022. This is a guest contribution by Rick Orford for SureDividend
Are you looking for the best REIT ETFs in 2022? With interest rates rising, REITs are certain to face downward pressure due to mortgage costs. Yet, REITs that invest in real property may fare better during high inflation. The question is whether the two will cancel each other out.
REIT ETFs often provide a more attractive dividend than bonds. Moreover, REIT ETFs offer further diversification by holding a basket of REITs to reduce portfolio risk. Further, dividend income is a key for those wanting to learn how to become financially independent.
For this article, we sifted through hundreds of real estate ETFs. Then, we sorted the ETFs and chose unique REIT ETFs that contain significant assets.
In this article
What Is An ETF?
ETFs are funds that hold stocks and perhaps other ETFs. Indeed, it’s understandable if investors think a mutual fund does the same. However, unlike a mutual fund, ETFs are traded on the secondary market (i.e., instantly traded) rather than directly with the mutual fund company. Further, investors who buy and sell ETFs get the advantage of having the trade settled when they buy or sell. Summing it up, one could say that an ETF is a fund that trades like a stock.
ETFs can hold assets such as stocks, other ETFs, foreign currencies, and even commodities such as gold. While most ETFs attempt to replicate the performance of an index such as the S&P 500 or Nasdaq, many others serve other purposes.
Passive Managed ETFs
Passively managed ETFs are the most common type of ETF. The fund manager automatically chooses a basket of assets such as individual REITs and rebalances once or twice a year. These types of ETFs often seek to replicate an Index’s performance, like the Dow Jones U.S. REIT Index, which tracks the performance of U.S. REITs.
Also, due (in part) to its turnover, expense ratios are often low.
Active Managed ETFs
Investors choose Actively Managed ETFs because they seek higher than average returns. But it comes at a cost. Indeed, actively managed ETFs have higher expense ratios (they cost more) because a manager spends more time managing the portfolio. However, the returns have the potential to beat the index. For this article, I focus on actively managed REIT ETFs.
What’s A REIT?
A REIT is also known as a Real Estate Investment Trust. You can see Sure Dividend’s full REIT list here.
A REIT is a publicly-traded company that owns, operates, or finances income-producing assets involving real estate. The most common REITs involve real estate properties that generate revenue from rents, such as apartment buildings.
I’d forgive an investor who thinks a REIT is a dividend stock. REITs trade on the secondary market like stocks do, and they pay dividends as many stocks do. However, unlike typical publicly-traded companies, REITs must distribute at least 90% of their income to investors.
Related: Dividend investing versus real estate investing.
And, investors must remember the income is net of expenses to operate the business. As a result, investors would receive less money than managing the same properties themselves. But that’s a trade-off REIT investors are happy to make.
REIT Risks
REITs often use leverage to grow. In other words, like most Americans who buy homes using mortgages, so do REITs when they purchase income-producing properties. Of course, REITs will borrow significantly more than the average single-family home. Furthermore, REITs will often borrow on a variable interest basis. As a result, REITs usually pay less interest when mortgage rates drop. And similarly, REITs will pay more interest when mortgage rates increase, as they are in 2022.
Historically, mortgage rates drop when the Federal Reserve needs to stimulate the economy, as in March 2020 during the COVID-19 crisis. On the other hand, mortgage rates rise when the economy is doing well – primarily to curb inflation.
When it comes to REITs, however, one of the biggest risks is: “Does the REIT have enough demand?”. In other words, is vacancy going to be a risk? When it comes to REIT ETFs, however, the answer might not be clear as the fund might invest in hundreds of REITs.
Are REITs A Good Investment?
REITs allow investors to participate in a specific real estate market without directly holding and managing the real estate. Let’s say I wanted to own apartment buildings. I could either buy the apartment buildings and manage them on my own. Or, I could buy a REIT or REIT ETF that offers exposure to apartment buildings. There are many excellent resources for Real Estate investing.
I probably won’t make as much money with the REIT or the ETF as owning the assets directly. However, REITs are more attractive to investors than those wanting to own the underlying real estate. To be sure, while the risks are similar, it’s much less work owning the REIT or the REIT ETF!
What’s A REIT ETF?
REIT ETFs offer diversification and reduce portfolio risk by investing assets in many different REITs. This way, the portfolio should mitigate a single REIT’s disappointing news, should it come.
Furthermore, REIT ETFs can come in the “leveraged” form. These leveraged REIT ETFs may offer investors a potential 2x or 3x return on an index and may include a “bull” or “bear” in the name. And, they profit when REITs in the portfolio go up or down in value. For example, a 3x Bear REIT ETF aims to produce the investor 3x the returns in a falling market. However, we intentionally left out these types of leveraged ETFs due to their risks.
REIT Taxation
REIT taxation isn’t as straightforward as owning a stock. REITs avoid paying corporate tax by distributing 90%+ of their income to investors. As a result, the tax burden passes to the investor.
Investors who receive income from REITs are getting a combination of income, short and long-term capital gains (and losses), and non-qualified dividends. As a result, it may be better to hold REITs and REIT ETFs in tax-sheltered accounts to ease the burden.
However, those who chose to hold REITs and REIT ETFs in taxable accounts can rest assured they will get a 1099-DIV and 8937 forms that account for all the income.
What Are the Best REIT ETFs?
Now that you’ve read through the background on REITs and REIT ETFs, I’ll cover the Best REIT ETFs. In this list, I’ll evaluate the following:
- Is the dividend safe? How likely will they continue to pay?
- Does the dividend grow? A stagnant dividend could mean a stagnant business.
- How long has the ETF been in business? Longevity is security.
- Total assets within the fund. More assets mean additional market participation.
- When does the dividend pay? Annually, Semi-Annually, Or Monthly?
- Is it liquid, and can you quickly sell the REIT ETF?
- Costs: Are the management fees low?
The Cheat Sheet
- Vanguard Real Estate ETF (VNQ)
- Vanguard Global ex-U.S. Real Estate ETF (VNQI)
- Global X Data Center REITs & Digital Infrastructure ETF (VPN)
- Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
- SPDR DJ Wilshire Global Real Estate ETF (RWO)
Vanguard Real Estate ETF (VNQ)
The Vanguard Real Estate is an ETF that invests in real estate investment trusts that purchase office buildings, hotels, and other real estate properties. The goal is to track the MSCI US Investable Market Real Estate 25/50 Index, designed to capture the large, mid, and small-cap segments of the U.S. equity universe.
With 174 holdings, this is the biggest REIT on the list, with assets exceeding $82.8 billion and a low expense ratio of just 0.12%. It’s no wonder that VNQ is a popular choice among investors. Some of VNQ’s top holdings include:
- Vanguard Real Estate II Index Fund
- Prologis Inc.
- American Tower Corp.
- Crown Castle International Corp.
- Equinix Inc.
Notably, 0% of the holdings are international.
Why Do We like VNQ?
The Vanguard Real Estate ETF is a highly liquid security that exposes investors to various U.S. real estate classes. With a competitive dividend yield of 2.19%, a 1 Year Total return of 1.99%, and a 5-year average return of 7.81% annually, VNQ is one of the best REIT ETFs investors can choose. Not only that, VNQ is one of the few real estate funds that hasn’t lost money in the last 12 months.
Vanguard Global ex-U.S. Real Estate ETF (VNQI)
The Vanguard Global ex-U.S. Estate is an ETF that invests in real estate investment trusts that purchase REITs in 30 countries other than the U.S. The goal is to offer investors exposure to a broad range of international real estate and mimic the S&P Global Ex U.S. Property NR USD performance.
The previous year has been difficult for international real estate. With 702 holdings, and assets exceeding $5.1 Billion, VNQI returned -13.2% over the past year. Its 5-year return is 1.41% annually and offers investors a low expense ratio of just 0.12%, VNQI could be ideal for investors seeking international real estate exposure (at a potentially fair price).
Some of VNQI’s top holdings include:
- Vonovia SE
- Goodman Group
- Mitsui Fudosan Co. Ltd.
- Mitsubishi Estate Co. Ltd.
- Mitsui Fudosan Co. Ltd.
Notably, none of the holdings are U.S.-based.
Why Do We Like VNQI?
VNQI offers investors exposure to real estate within an international ETF and offers a current dividend yield of 0.87%.
Global X Data Center REITs & Digital Infrastructure ETF (VPN)
Investors looking to capitalize on the Internet’s growth can look to the newly created Global X Data Center REIT & Digital Infrastructure ETF. Indeed, VPN invests in property that houses the servers that power the Internet (Data Centers) and other digital infrastructure. And thanks to the COVID-19 pandemic forcing just about everyone to work from home, it’s no surprise that data centers were recently the best performing REIT.
Since its inception, VPN has increased its assets to $83.11 Million, and it invests in 24 different REITs. Their top holdings include:
- American Tower Corp.
- Crown Castle Intl Corp.
- Equinix Inc.
- Digital Realty Trust Inc.
- China Tower Corp LTD-H
Why Do We Like It?
Data center space is nearly recession-proof. The current SEC Yield on VPN is 1.39%. We feel VPN could offer investors significant gains over the long term. Since its inception (10/27/2020), VPN has returned 7.75%.
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
The Pacer Benchmark Industrial REIT ETF is another newcomer to the ETF world. With an inception date of 5/14/2018, INDS offers investors a rules-based approach that attempts to replicate the Benchmark Industrial Real Estate SCTR Index.
INDS has over $314 Million in 20 assets and charges a competitive 0.6% expense ratio. As of 3/31/2022, this ETF has 86.32% of its assets in industrial REITs and 13.68% in warehouse REITs.
The top holdings include:
- Duke Realty Corp.
- Prologis Inc.
- Rexford INDL RLTY Inc.
- PS Business PKS Inc. CALF
- Americold Realty Trust Inc.
Why Do We Like It?
The Pacer Benchmark Industrial REIT ETF offers investors exposure to industrial and warehouse properties that are part of the e-commerce distribution.
“Thanks to the rapid growth of e-commerce due to online shopping, industrial REITs outperformed the market by 4.1%.” — Indexology® Blog
Since its inception, INDS has grown 22.65% annually. That said, its one-year return is -9.25%. While the dividend yield is just 1.58%, we feel there could be room to grow. Indeed, the distribution tends to move up and down based on net income for the period, and the current yield is based solely on the last distribution.
SPDR DJ Wilshire Global Real Estate ETF (RWO)
The SPDR DJ Wilshire Global Real Estate ETF seeks to replicate the Dow Jones® Global Select Real Estate Securities Index’s total return performance. Indeed, this REIT ETF holds a diversified mix of assets in the U.S. and abroad.
RWO currently has more than $1.336 Billion in assets and manages them at a competitive 0.50% fee. Further, the top five holdings include:
- Prologis Inc.
- Public Storage
- Welltower Inc.
- Realty Income Corporation
- Digital Realty Trust Inc.
Why Do We Like It?
The SPDR DJ Wilshire Global Real Estate ETF has a well-rounded, multi-sector portfolio with a primary allocation in the industrial and retail spaces. Indeed, they also have residential, healthcare, self-storage, and other asset classes. The 1-year return on market value is lackluster at -2.04%. And the 5-year return is 3.99% and offers a 2.41% dividend yield, paid quarterly.
REIT ETF FAQ
What is the best REIT ETF?
In terms of growth, dividend yield, recent performance, and diversification, we feel the best REIT ETFs are:
- Vanguard Real Estate ETF (VNQ)
- Vanguard Global ex-U.S. Real Estate ETF (VNQI)
- Global X Data Center REITs & Digital Infrastructure ETF (VPN)
- Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
- SPDR DJ Wilshire Global Real Estate ETF (RWO)
Are REITs ETF a good investment?
REIT ETFs provide a more attractive dividend than bonds. Moreover, they offer investors instant diversification by holding a basket of REITs to reduce portfolio risk.
Are REITs better than ETFs?
Investors who buy REITs are buying an individual real estate investment trust. However, investors who buy REIT ETFs buy a portfolio of REITs, giving them instant diversification.
What are the most popular REIT ETF providers?
The most popular REIT ETFs are provided by: Vanguard, Fidelity, Schwab, iShares, Invesco, State Street Global Investors, UBS, and WisdomTree.
Final Thoughts
Finding the best REIT ETF for your portfolio comes down to what diversification you’re seeking. Investors who buy a combination of VNQ and VNQI can say, “I have real estate in my portfolio,” and they’d be right. That combination offers broad, international diversification that would be impractical to reproduce. However, those looking to pick a sector to outperform the overall real estate sector need only look at a more specialized REIT ETF.
Further Reading: 10 Super High Dividend REITs With Yields Up To 10%
Disclaimer: Dividend yields are courtesy of Yahoo Finance as of 06/08/2022; all other data is as of month-end, 03/31/2022. The author is not a holder of any of the above-listed REIT ETFs.
Other Dividend Lists
The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 38 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
This article was first published by Bob Ciura for Sure Dividend
Sure dividend helps individual investors build high-quality dividend growth portfolios for the long run. The goal is financial freedom through an investment portfolio that pays rising dividend income over time. To this end, Sure Dividend provides a great deal of free information.
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