Over the last two decades, real estate has outperformed the S&P 500 Index, growth stocks, value stocks, bonds, gold, and nearly every other asset class.
Real estate investment trusts (REITs) and REIT exchange-traded funds (ETFs) have rebounded in 2021 after a COVID-related fall last year, producing substantial returns supported by vaccine rollouts, ongoing low interest rates, and a growing US economy.
REITs have a well-deserved place in many investor portfolios because of their potential to provide inflation protection, income, and safety. While there’s nothing wrong with owning individual real estate equities, REIT ETFs are frequently a better option.
Instant diversification and competent portfolio management at a cheap cost are two advantages of real estate funds.
Another advantage of REIT ETFs is their diversity; according to Nareit, the world’s biggest developer of REIT investment research, investors can choose from 30 distinct products. Real estate funds are available to cater to active and passive investment approaches, as well as value, income, and growth objectives, as well as maximizing exposure to certain real estate categories.
Here are seven REIT ETFs for investors of all types. They cover a wide range of industries and target various investment approaches and aims, so no matter what type of investor you are, you’ll find a low-cost choice that meets your needs here.
What is the difference between ETF and REIT?
ETF and REIT shares can both be purchased through a stock brokerage account, and you can invest in both forms of investments if they meet your objectives. REIT shares give investors access to a variety of commercial real estate industries and often pay higher dividend yields than other companies. ETF shares give investors access to the broad stock market through one or two funds, or they might concentrate on certain market sectors. Commodity-focused exchange-traded funds (ETFs) give investors access to a new asset class. Selecting individual REITs to invest in will necessitate a more in-depth examination of the companies. Because an ETF offers a diversified investment in a single security, the research required focuses on the market or sector that the ETF covers.
Is investing in REITs a good idea?
REITs are a significant investment for both retirement savings and retirees who want a steady income stream to fund their living expenditures because of the high dividend income they generate. Because REITs are obligated to transfer at least 90% of their taxable profits to their shareholders each year, their dividends are large. Their dividends are supported by a consistent stream of contractual rents paid by their tenants. REITs are also an useful portfolio diversifier due to the low correlation of listed REIT stock returns with the returns of other equities and fixed-income investments. REIT returns tend to “zig” while other investments “zag,” lowering overall volatility and improving returns for a given amount of risk in a portfolio.
- Long-Term Performance: REITs have delivered long-term total returns that are comparable to those of other stocks.
- Significant, Stable Dividend Yields: REIT dividend yields have historically provided a consistent stream of income regardless of market conditions.
- Shares of publicly traded REITs are readily available for trading on the major stock exchanges.
- Transparency: The performance and prognosis of listed REITs are monitored by independent directors, analysts, and auditors, as well as the business and financial media. This oversight offers investors with a level of security as well as multiple indicators of a REIT’s financial health.
- REITs provide access to the real estate market with low connection to other stocks and bonds, allowing for portfolio diversification.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Do REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
How is a REIT ETF taxed?
How are dividends from REIT ETFs taxed? After the 20% qualifying business income deduction is applied to those distributions, most REIT ETF dividends will be taxed at your regular income tax rate. Some REIT ETF earnings may be subject to capital gains tax, which will be reported on Form 1099-DIV.
Is REIT a good investment in 2021?
Three primary causes, in my opinion, are driving investor cash toward REITs.
The S&P 500 yields a pitiful 1.37 percent, which is near to its all-time low. Even corporate bonds have been bid up to the point that they now yield a poor return compared to the risk they pose.
REITs are the last resort for investors looking for a decent yield, and demographics support greater yield-seeking behavior. As people near retirement, they typically begin to desire dividend income, and the same silver tsunami that is expected to raise healthcare demand is also expected to increase dividend demand.
The REIT index’s 2.72 percent yield isn’t as high as it once was, but it’s still far better than the alternatives. A considerably greater dividend yield can be obtained by being choosy about the REITs one purchases, and higher yielding REITs have outperformed in 2021.
Dividend taxation
REITs pay out higher-than-average dividends and aren’t subject to corporate taxes. The drawback is that REIT earnings don’t always qualify as “qualified dividends,” which are taxed at a lower rate than ordinary income.
REITs qualified for the new 20% pass-through deduction introduced by the Tax Cuts and Jobs Act because they are pass-through investment vehicles. REIT dividends, on the other hand, are normally taxed at a higher rate than eligible dividends. If you own REITs through a traditional (taxable) brokerage account, keep this in mind.
Interest rate sensitivity
Interest rate swings can make REITs extremely vulnerable. The most important aspect to remember is that rising interest rates are detrimental for REIT stock values. When a general rule, as the yields on risk-free investments like Treasury securities grow, so do the yields on other income-based investments. The 10-year Treasury yield is a good indication of REIT performance.
Because price and yield are inversely proportional, higher yields imply lower prices. REIT prices and Treasury rates generally move in opposite directions, as shown in the chart below:
Can you lose money in a REIT?
- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
Can you get rich off REITs?
There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.
However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).
