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Introduction
Are you looking for a smart investment opportunity? Real Estate Investment Trusts (REITs) are an excellent choice. In this article, we will explore the three best-performing REIT ETFs that can provide you with diversified exposure to the real estate sector. Whether you're seeking a source of passive income or a way to diversify your portfolio, investing in REITs can be a profitable venture.
Investing in Real Estate Stocks or REITs
A REIT is a company that owns or operates real estate properties to generate income. Investors buy real estate stocks or REITs to benefit from the passive income they provide. Additionally, investing in REITs can offer portfolio diversification. As the economy grows, so does the value of REITs and their underlying assets.
Tip: When interest rates are low, the value of REITs tends to increase even further. This is because low interest rates reduce borrowing costs for REITs.
The State of REITs in 2022
While REITs have performed well in recent economic and market conditions, investors should exercise caution as interest rates rise in 2022. Higher interest rates can decrease property values and increase borrowing costs for REITs. This can have a negative impact on REIT profits and their stock prices.
REIT ETF Basics
Exchange-traded funds (ETFs) are an excellent way for investors to gain diversified exposure to REITs and the real estate sector as a whole. Instead of buying individual REITs, investors can purchase a basket of dozens of REITs within a single security. This allows for greater convenience and reduces risk. Investors can also choose to focus on specific niche areas of the real estate market, such as residential or retail REITs.
Currently, there are 35 ETFs trading on US markets that focus on REITs and real estate equity. The largest REIT ETF by market capitalization is the Vanguard Real Estate ETF (VNQ), which has a staggering $81.8 billion in assets.
Evaluating REIT ETFs
To evaluate and analyze REIT ETFs, investors can utilize an ETF screener, such as the one provided by Seeking Alpha. By selecting the "Sector Equity" asset class and "Real Estate" sub-class, investors can review fund basics, performance, holdings, yield, and risk. The selection criteria for the best REIT ETFs are as follows:
- Performance: Evaluate 1-year returns as the primary indicator of performance. However, it's essential to review longer periods, such as 3-, 5-, and 10-year returns, before making a final decision.
- Expenses: Consider the expense ratio of the fund, as lower expenses generally lead to better performance, especially when ETFs track the same index.
- Objective: Focus on ETFs primarily holding REITs and real estate stocks. Exclude ETFs with alternative strategies, such as inverse or leveraged ETFs.
- Portfolio Holdings: Look for real estate ETFs that hold a diverse range of REITs and other real estate industry stocks, both in the US and globally.
- Quant Ratings and Factor Grades: Seeking Alpha's Quant Ratings and Factor Grades offer valuable insights for evaluating ETFs, such as momentum, expenses, dividends, risk, and asset flows.
The 3 Best-Performing REIT ETFs
1. Pacer Benchmark Industrial Real Estate ETF (INDS)
- 1-year performance: 31.33%
- Expense Ratio: 0.60% (or $60 annually for every $10,000 invested)
- SEC Yield: 1.67%
- Three-Month Average Daily Volume: 99.7K
The Pacer Benchmark Industrial Real Estate ETF seeks to track the performance of the Kelly Industrial Real Estate Index. It focuses on industrial REITs associated with eCommerce distribution, logistics networks, and self-storage facilities. This ETF outperforms the broader real estate index and the S&P 500 for the 1-year and 3-year returns.
2. Nuveen Short-Term REIT ETF (NURE)
- 1-year performance: 30.44%
- Expense Ratio: 0.35% (or $35 annually for every $10,000 invested)
- SEC Yield: 2.24%
- Three-Month Average Daily Volume: 36.2K
The Nuveen Short-Term Real Estate ETF tracks the Dow Jones U.S. Select Short-Term REIT Index. It specializes in U.S. REITs focused on apartment buildings, hotels, self-storage facilities, and manufactured home properties. While it outperforms the broader real estate index for the 1-year return, it lags behind the S&P 500 for the 3-year and 5-year returns.
3. iShares Residential and Multisector Real Estate ETF (REZ)
- 1-year performance: 29.37%
- Expense Ratio: 0.48% (or $48 annually for every $10,000 invested)
- SEC Yield: 1.88%
- Three-Month Average Daily Volume: 169.1K
The iShares Residential and Multisector Real Estate ETF focuses on U.S. residential, healthcare, and self-storage real estate equities. With strong 1-year returns, it outperforms the broader real estate index. However, it lags behind the S&P 500 for the 3-year, 5-year, and 10-year returns.
Bottom Line
Investing in REIT ETFs can be an excellent way to generate income and diversify your investment portfolio. However, it's crucial to remember that REIT stocks carry market risk and can experience short-term fluctuations. Before making any investment decisions, analyze the performance, expenses, holdings, and qualitative factors of the ETF. Keep these considerations in mind, and you'll be well on your way to making informed investment choices in the dynamic world of real estate.
