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Are REIT ETFs Good For Extra Real Estate Exposure?

If increasing your wealth is your goal, you have to invest. Investing can be done in numerous ways. I’m a big fan of investing in stocks through low cost index funds and ETFs. I’m also a wannabe real estate investor, still looking for my first rental property. It is possible to merge these two investing strategies, by investing in REIT ETFs. Is investing in REIT ETFs worth it? Let’s find out!

So, What Is A REIT? 

A REIT is a Real Estate Investment Trust. It’s a company that holds real estate, usually rented out. These companies are aiming at generating income by operating the rentals. A large portion of their income, by law, has to be paid out to shareholders in the form of dividends.

Are There REIT ETFs? 

Yes, of course, there are. Most (large) ETF providers offer REIT ETFs, to enable their investors to invest in REIT tracking ETFs.

I have written about why ETFs are great in the past. Honestly, I see no reason to invest in individual stocks. It’s a lot of work, and frankly, a lot of risk. The same goes for REITs. Instead of buying single REITs, I’d rather just buy a REIT ETF.

Luckily, they exist! In the US, the most common ones are VNQ and SCHH.

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Correlation Between Stocks And REITs

If you want to diversify your investment portfolio, you must invest in asset classes with a low or negative correlation. A positive correlation means that the movement of one asset class is the same as the movement of the other asset class. A negative correlation means that the movement is mirrored, so if Class A goes up, Class B goes down and vice versa. 

So what is the correlation between stocks and REITs, you might wonder? Great question! 

Now, before we dive into this question in detail, you have to know that REITs are, in fact, stocks themselves. A REIT is not a piece of real estate. A REIT is a company that makes money in renting out real estate. So basically a REIT is a stock, right?  

For example, if you want to diversify away from stocks because the downward volatility of stocks is too much. You might choose to buy another asset class that is not (or even better, negatively) correlated with stocks so that when stocks drop in price, your other asset stays flat or even increases in price. Traditionally, investors use bonds for this purpose. Let’s look at how REITs would help.

During the financial crisis of 2008, both the overall stock market and REITs lost a massive amount of value. Let’s look at two ETFs, “SPY” for the stock market (S&P 500) and “VNQ” for REITs.

Stocks vs REITs, a comparison of SPY and VNQ

You could say that these assets were positively correlated during this timeframe. Both of them dropped a comparable amount (keep in mind the above graph only shows price data, not total return).

Other bloggers such as a Wealth of Common Sense have investigated this correlation as well and saw that there are minor benefits when combining the two asset classes, both by increasing total returns and decreasing volatility. 

What Are Some Good REIT ETFs?

While I can’t really answer this, because I don’t give investment advice, I can list some criteria I have for selecting ETFs and apply those to some well-known REIT funds. 

The main things I look for when selecting an ETF to invest in, are costs and diversification. Let’s look at some of the bigger REIT ETFs and see how they score on these criteria:

VNQ has an expense ratio of 0.12%, which is well in the range where I would expect my low-cost ETFs to be. It invests in 183 stocks, which isn’t that much compared with the thousands of stocks that are the basis of my index funds VWRL and IUSN. However, it’s still a nice way to get some additional exposure to real estate without picking individual companies.

SCHH does it even better, cost-wise. Schwab got the expense ratio down to an incredible 0.07%. The diversification is a bit less though. SCHH invests in 102 REITs at the moment.

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Dividend Payments by REIT ETFs

One of the bigger reasons to invest in REITs is because of the cashflow they generate. REITs usually pay out most of their profits in the form of dividends to shareholders, which makes them an excellent asset class for investors looking to increase their dividend income.

But be aware that dividend payments may fluctuate, and that yield is all but certain. For any dividend investor, however, REIT ETFs might help them diversify their portfolio and still generate some interesting dividend returns. 

Would I Invest In REIT ETFs?

Currently, I don’t think REITs have a place in my portfolio. I want to increase my holdings in VWRL and IUSN a bit further before I am going to think about additional strategies.

That doesn’t mean though that I think REIT ETFs are a bad investment. I definitely think there are times and places where REITs make sense, it’s just not for me right now.

Do you own individual REITs or REIT ETFs? Let me know in the comments!

2 thoughts on “Are REIT ETFs Good For Extra Real Estate Exposure?”

  1. What about Europien RIET ETFs ?

    I recently reviewed iShares iShares European Property Yield UCITS ETF EUR (Dist) – IE00B0M63284.
    It covers 58 REITs with 0.4% costs and Excludes UK REIT companies (with the BREXIT going on, I prefer to avoid having UK assets or at least reduce them).

    This ETF is in DEGIRO ETF selection.

    • Sounds great! 0.4% TER is a bit high but not too extreme I’d say. Also, 58 REITs isn’t that much diversification but still better than nothing, plus in euros so no currency risk in your dividends!

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