What to Know About Passive REIT ETFs

Real estate can be a very useful part of a diversified investment portfolio, and real estate investment trusts are one of the easiest ways for most investors to get exposure to that sector. For anyone seeking access to the broad REIT market, exchange-traded funds are generally one of the cheapest and most tax-efficient options. We recently surveyed actively managed REIT ETFs, which are a relatively new and small niche.

Passive REIT ETFs are a larger group with far more assets under management, and the range of options can be bewildering. Unlike most areas of the equity investing world, there is no standard benchmark for REITs; instead, there are dozens of diversified REIT indexes, which often hold many of the same stocks but feature differences in emphasis and portfolio construction. There are also specialized REIT indexes that focus on subsectors like residential REITs, mortgage REITs, and data centers.

US REIT ETFs

The most popular group of passive REIT ETFs are those that track diversified US REIT indexes. This group includes the four largest REIT ETFs: Vanguard Real Estate ETF VNQ, Schwab US REIT ETF SCHH, The Real Estate Select Sector SPDR XLRE, and iShares US Real Estate ETF IYR. All four track different benchmarks, and they vary significantly in the number of stocks they hold, from 31 for the SPDR ETF to 157 for the Vanguard one. Yet they feature very similar allocations to the various REIT subsectors, such as residential, retail, and specialty, and the eight largest holdings in each fund’s most recent portfolio are identical, led by top holding Prologis PLD. The Schwab ETF differs from the others in that it can only hold stocks classified as REITs, so it doesn’t hold non-REIT real estate stocks such as CBRE Group CBRE, a top-10 holding in the other three portfolios.

In addition to its US Real Estate ETF, which tracks the Dow Jones US Real Estate Capped Index, iShares has two US REIT ETFs that track different, more restrictive indexes: iShares Core US REIT ETF USRT, which tracks the FTSE Nareit Equity REITs Index, and iShares Cohen & Steers REIT ETF ICF, which tracks the Cohen & Steers US Realty Majors Index. Neither of those indexes include real estate stocks that are not classified as REITs, such as CBRE Group and CoStar Group CSGP, or timber REITs such as Weyerhaeuser WY. The FTSE index also does not include cell tower REITs, which have become a substantial part of most US REIT indexes, and the Cohen & Steers index does not include many healthcare REITs.

The ETFs discussed above have the bulk of the assets in this space, but there are a few others. The largest of these are Fidelity MSCI Real Estate ETF FREL and JPMorgan BetaBuilders MSCI US REIT ETF BBRE, which track different MSCI indexes. One oddity is Invesco S&P 500 Equal Weight Real Estate ETF RSPR. It holds the 31 real estate stocks in the S&P 500 index, the same ones held by the Real Estate Select Sector SPDR discussed above, except that it weights them equally, rebalancing the portfolio quarterly.

Global REIT ETFs

Another group tracks global or international REIT indexes. The largest of these is iShares Global REIT ETF REET, which tracks the FTSE EPRA Nareit Global REITs Index. About 75% of its most recent portfolio is domiciled in the US, with the rest coming from developed countries in Europe and Asia, as well as Australia. The SPDR Dow Jones Global Real Estate ETF RWO tracks a Dow Jones global real estate index with a similar geographic allocation. Both indexes do not include cell tower REITs, but their allocation to other REIT subsectors is otherwise similar to those of the broad US REIT ETFs discussed above.

Then there are ETFs that only hold real estate stocks from outside the US, making them good counterparts to the broad US REIT ETFs. Vanguard Global ex-US Real Estate ETF VNQI is the largest of these by assets. It tracks the S&P Global ex-US Property Index, which includes stocks from both developed and emerging markets, and it’s positioned as a complement to Vanguard Real Estate ETF. Xtrackers International Real Estate ETF HAUZ and SPDR Dow Jones International Real Estate ETF RWX are similar, but with somewhat fewer emerging-markets holdings. On the other hand, iShares International Developed Real Estate ETF IFGL, as its name suggests, only holds stocks from developed markets and lacks significant emerging-markets exposure.

Specialized REIT ETFs

Finally, there are real estate ETFs that track more specialized indexes. IShares Mortgage Real Estate Capped ETF REM and VanEck Mortgage REIT Income ETF MORT hold mortgage REITs, which own portfolios of mortgages rather than actual properties and generate more income than property REITs. Other REIT ETFs also go for high income but use a broader range of methods to do so, such as Invesco KBW Premium Yield Equity ETF KBWY, Global X SuperDividend REIT ETF SRET, and Hoya Capital High Dividend Yield ETF RIET. Like other investment vehicles that have a high yield as their primary goal, these tend to be risky and very sensitive to interest rates.

Another group of ETFs focus on subsectors of the REIT world. IShares Residential and Multisector Real Estate ETF REZ, Pacer Benchmark Industrial Real Estate Sector ETF INDS, and VanEck Office and Commercial REIT ETF DESK emphasize residential, industrial, and office REITs, respectively. Several ETFs focus on data center and infrastructure (cell tower) REITs, which have become quite popular over the past decade as plays on the growth of cloud computing and mobile computing. These include Pacer Benchmark Data & Infrastructure Real Estate Sector ETF SRVR, a companion to the same firm’s industrial REIT ETF; Global X Data Center & Digital Infrastructure ETF VPN; FirstTrust Alerian Disruptive Tech Real Estate ETF DTRE; and Wisdom Tree New Economy Real Estate ETF WTRE.

A final small group of ETFs hold REITs that have positive environmental, social, and governance characteristics, such as owning “green” buildings that minimize their environmental impact. These include iShares Environmentally Aware Real Estate ETF ERET, ETFB Green SRI REITs ETF RITA, and Invesco MSCI Green Building ETF GBLD. These ETFs are small, each with less than $10 million in assets under management, indicating investors’ limited appetite for such specialized products.

Costs

All of the ETFs we’ve been discussing are pretty cheap relative to most mutual funds, though some are cheaper than others. Out of the 43 US-domiciled ETFs in the real estate and global real estate Morningstar Categories, only one has a prospectus expense ratio higher than 0.60%. That includes the very specialized ETFs discussed above.

The lowest prospectus expense ratio of the bunch is for Schwab US REIT ETF at 0.07%, followed closely by The Real Estate Select Sector SPDR, iShares Core US REIT ETF, and Fidelity MSCI Real Estate ETF at 0.08% each. The Xtrackers and JPMorgan offerings are next at 0.10% and 0.11%. Somewhat surprisingly, the two Vanguard real estate ETFs are a little more expensive, at 0.12% for the Global ex-US Real Estate ETF and 0.13% for the Real Estate ETF. They are both technically share classes of the corresponding mutual funds, Vanguard Real Estate Index VGSLX and Vanguard Global ex-US Real Estate Index VGRLX, and they cost the same as the Admiral shares of those funds.