For retail investors, the exchange traded fund boom has opened up a plethora of opportunities for portfolio construction. From simple indexing approaches to more complex strategies, ETFs are quickly becoming the go-to investment vehicle. Nowhere is that more prevalent than the world of real estate. Overall, the continued evolution of the ETF industry has allowed investors to gain cheap and easy access to the commercial and residential real estate markets within one single ticker [see The Best Dividend ETF For Every Investment Objective].
For many investors, real estate has become an integral part of a well-diversified portfolio and offers several distinct advantages.
First, real estate can provide stable and high income. Created in the 1960s as a way to allow regular retail investors to participate in the commercial real estate market, real estate investment trusts (REITs) are traded on the major exchanges like stocks and invest in real estate directly––either through physical properties or through mortgage investment. In exchange for offering investors high-dividend distributions, REITs receive special tax considerations.
Second, real estate offers the potential to hedge against rising inflation as rents are generally designed to keep pace with increasing prices. Not to mention that owning physical property and goods can be quite beneficial in periods of sustained inflation. Finally, as a non-correlated asset class, real estate adds a level of diversification to a portfolio and can actually “smooth-out” returns over long stretches of time.
All of these benefits on their own are worth adding real estate and REITs to a portfolio. However, combining them with the low cost, intraday tradability, diversification advantages of ETFs, and investors have perhaps the perfect way to gain exposure to the asset class.
Nonetheless, that “perfection” still has limits.
Rising and falling interest rates, home values and consumer confidence can play havoc with real estate returns in the short run. For example, the 2008 housing crisis sent the industry into a tailspin and many real estate investments turned sour. However, the sector has managed to rebound since those lows and historically real estate has been pretty stable place to park your money.
Not All Real Estate ETFs Deliver High Yields
Though one of the biggest appeals of real estate ETFs is their yield, there is a very broad range when it comes to those dividend payments. For example, the iShares Cohen & Steers Realty Majors (ICF), which bets on some of the largest REITs in the U.S., currently yields only 2.15 percent, while the mortgage REIT tracking iShares FTSE NAREIT Mortgage Capped Index (REM) yields a staggering 12.68 percent.
Some, like SPDR S&P Homebuilders (XHB), which is more of a play on housing construction than the ownership of physical buildings, yields barely anything at all. For those looking for dividends, the following are good places to start: