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The Best REIT ETFs In 2023


Updated on June 27th, 2023

This is a guest contribution by Rick Orford.

Wondering what are the best REIT ETFs to invest in in 2023? With the Fed signaling that rate hikes are still likely to come, REITs face continuous downward pressure due to high mortgage costs. Yet, REITs that invest in real property may fare better during high inflation. The question is whether the two will cancel each other out and which ones have weathered the current environment for their investors.

REIT ETFs often offer a more attractive dividend than bonds. Moreover, REIT ETFs provide their investors with further diversification by holding a basket of REITs to minimize portfolio risk. Further, dividend income is one of the best ways to learn how to become financially independent.

You can download your free 200+ REIT list (along with important financial metrics like dividend yields and payout ratios) by clicking on the link below:

 

Click here to instantly download your free spreadsheet of all REITs Stocks now, along with important investing metrics.

For this article, we sifted through hundreds of real estate ETFs. Then, we sorted the ETFs and chose those performing well in the last 3 years and those containing significant assets.

What Is An ETF?

ETFs are funds that hold stocks and sometimes other ETFs. Some may think a mutual fund does the same, which is understandable. However, unlike a mutual fund, ETFs, where you transact directly with the mutual fund company, they can be traded on the secondary market (i.e., instantly traded). Further, investors who trade ETFs get the advantage of having the trade settled when they buy or sell. Summing it up, one could say that an ETF is a fund that trades like a stock.

ETFs can hold different kinds of assets, such as stocks, foreign currencies, other ETFs, and even commodities, such as silver or gold. While most ETFs attempt to replicate the performance of an index like the S&P 500 or Nasdaq, others serve other purposes.

Passive Managed ETFs

Passively managed ETFs are the most common type of ETF where the fund manager automatically chooses the basket of assets that will be in the ETFs, such as individual REITs, which get rebalanced once or twice a year. These types of ETFs try to closely replicate an Index’s performance, like the Dow Jones U.S. REIT Index, which tracks the performance of U.S. REITs. Also, due (in part) to its turnover, expense ratios are often low.

Active Managed ETFs

For investors who seek higher-than-average returns would mostly choose these kinds of ETFs. But it comes at a cost. Actively managed ETFs have higher expense ratios (they cost more) because of how the manager spends more time managing the portfolio. However, the returns have the potential to beat the index. For this article, I focus on actively managed REIT ETFs.

What’s A REIT?

A REIT is also known as a Real Estate Investment Trust. You can see Sure Dividend’s full REIT list here.

A REIT is a publicly-traded company that owns, operates, or finances income-producing assets involving real estate. Real estate properties that generate revenue from rents, such as apartment buildings, are some of the most common assets of REITs.

I’d forgive an investor who thinks a REIT is a dividend stock because of how they also redistribute their income to their investors. However, unlike your typical publicly-traded companies, REITs must distribute at least 90% of their income to investors. REITs trade on the secondary market as stocks do, paying dividends as many stocks do.

Related: Dividend investing versus real estate investing.

In addition, investors should always remember that the income is net of expenses to operate the business. As a result, investors would receive less money than managing these properties themselves. But that’s a trade-off REIT investors will gladly make.

REIT Risks

REITs, in most cases, would use leverage to grow. In other words, like most Americans who buy homes using mortgages, it is the same for REITs when they purchase income-producing properties for their portfolio. Of course, REITs will borrow significantly more than the average single-family home due to the nature of their business. Furthermore, REITs will often borrow on a variable interest basis that lets REITs pay less interest when mortgage rates drop. However, this also puts REITs at risk of paying more interest when mortgage rates increase, as they have been since 2022.

Historically, mortgage rates drop when the Federal Reserve steps in to stimulate the economy by lowering interest rates, as in March 2020 during the COVID-19 crisis. On the other hand, mortgage rates rise when the economy is doing well – to help curb inflation.

Regarding REITs, however, one of its biggest risks is: “Is there enough demand for the REIT?”. In other words, will vacancy pose a greater risk? When it comes to REIT ETFs, however, the answer to this might not be that clear and simple, as the fund might invest in hundreds of REITs.

Are REITs A Good Investment?

REITs allow investors to participate in a specific real estate market without the need to hold and manage the real estate asset. Let’s say I wanted to own an apartment building. I can either buy the apartment buildings or manage them on my own. Or, I could buy a REIT or REIT ETF that offers similar exposure to apartment buildings minus the capital requirement and time to manage the asset. There are many excellent resources for Real Estate investing.

I probably won’t make as much money with the REIT or the ETF as having the assets in my portfolio. However, REITs offer a good bargain for any investor that wants to own the underlying real estate. The risks may be similar, but it requires much less work to own the REIT or the REIT ETF!

What’s A REIT ETF?

By investing assets in many different REITs, REIT ETFs offer a lower portfolio risk through diversification. This way, should a single REIT’s disappointing news come out, the portfolio should mitigate the risk due to the other REITs’ performance.

Furthermore, sometimes REIT ETFs may come in the “leveraged” form. These leveraged REIT ETFs may offer investors the potential to get a 2x or 3x return on an index and may include a “bull” or “bear” in the name. And these ETFs profit when REITs in the portfolio go up or down in value. For example, a 2x Bear REIT ETF aims to produce the investor’s 2x the returns in a falling market. However, we intentionally chose to leave out these types of leveraged ETFs due to their risks.

REIT Taxation

REIT taxation isn’t as straightforward as it is when you own a stock. REITs avoid paying corporate tax by distributing +90% of their income to investors to avoid the tax burden, which is then shouldered by its investors.

Investors who receive income from REITs get a combination of income, short and long-term capital gains (and losses), and non-qualified dividends. To ease the burden, holding REITs and REIT ETFs in tax-sheltered accounts is advisable.

However, those who choose to hold REITs and REIT ETFs in taxable accounts will get a 1099-DIV and 8937 forms that account for all the income.

What Are the Best REIT ETFs?

Now that you’ve read through the background on REITs and REIT ETFs, let’s look at the Best REIT ETFs. In this list, I’ll be evaluating the following:

The Cheat Sheet

  1.   The Invesco S&P 500 Equal Weight Real Estate ETF (RSPR)
  2.   JPMorgan Realty Income ETF (JPRE)
  3.   Vident US Diversified Real Estate ETF (PPTY)
  4.   Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
  5.   Real Estate Select Sector SPDR Fund (XLRE)

The Invesco S&P 500 Equal Weight Real Estate ETF (RSPR)

The Invesco S&P 500 Equal Weight Real Estate ETF is an ETF that consists of equity REITs and companies that are classified as Diversified Real Estate Activities Companies. Its main goal is to track and replicate the performance of the S&P 500 Equal Weight Real Estate Index, designed to capture the real estate sector except for mortgage REITs.

The ETF has 32 holdings and assets valued at $93.40 million. The ETF offers an expense ratio of 0.40%, and its top holdings include:

Why do we like it?

The ETF provides its investors with physical exposure to its assets, so by buying it, investors own parts of all 32 underlying holdings. With a 12-month distribution rate of 2.95% and a 3-year total return performance of 8.49%, the ETF can still preserve its returns despite the pandemic’s impact on the economy.

JPMorgan Realty Income ETF (JPRE)

This ETF primarily invests in stocks of real estate investment trusts (REITs) across different market capitalization spectrums. The ETF continuously screens and finds companies in the REIT universe that show financial strength, attractive growth potential, and great operating revenues. The fund utilizes data for an in-depth evaluation of each company’s current price and long-term value. The ETF’s assets are valued at $413.75 million as of 5/31/2023 and an expense ratio of 0.69%. Its top holdings include:

Why do we like it?

JPMorgan Realty Income ETF is one of the few funds with a Morningstar Gold Medalist Rating, which indicates that the fund is likely to generate positive returns even after fees.  The ETF has a 3-year market performance of 7.1% and a 1.17% NAV performance YTD. Since inception, the fund has returned 8.35%.

US Diversified Real Estate ETF (PPTY)

The fund seeks to track the performance (before fees and expenses) of the PPTYX US Diversified Real Estate Index and invests at least 80% in the Index’s component securities.

PPTYX provides investors with exposures that favor dynamic, high-growth locations that blend diversification and balance among its property holding types. The ETF also focuses on companies that are prudent with their leverage to avoid significant governance risks. It offers an expense ratio of 0.49% and has assets valued at $118.66 million. Its top holdings consist of:

Why do we like it?

With high interest rates and inflation, the funds’ approach to focus on companies that are prudent with their leverage provides a sense of safety and priority to capital preservation of returns for the fund. The fund may have a 3-year average annual market return of 5.63%, but its YTD performance shows it can still hold its ground over most ETFs with a -1.95% return. The ETF also offers an attractive 4.44% distribution yield.

Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)

The Pacer Benchmark Industrial REIT ETF is still a newcomer to the ETF world. With an inception date of 5/14/2018, INDS offers investors a rules-based approach that attempts to replicate the Benchmark Industrial Real Estate SCTR Index.

INDS has over $208 Million in 30 assets and charges a competitive 0.6% expense ratio. As of 3/31/2022, this ETF has 60.51% of its assets in industrial REITs and 39.49% in warehouse REITs. The top holdings include:

Why Do We Like It?

The Pacer Benchmark Industrial REIT ETF offers investors exposure to industrial and warehouse properties that are part of the e-commerce distribution. YTD, Pacer has a market performance return of 7.18%, beating its benchmark’s performance of 6.96% which is difficult in the current market conditions.  That said, its one-year return is -18%, and 14.45% for its 3-year return as of 3/31/2023, which is impressive as it was able to preserve its performance even with the effects of the pandemic.

While the dividend yield is just 0.21%, it has room to grow once the economy continues recovering from inflation and high interest rates. Indeed, the distribution tends to move up and down based on net income for the period, and the current yield is based solely on the last distribution.

Real Estate Select Sector SPDR Fund (XLRE)

The Real Estate Select Sector SPDR Fund is an ETF that tracks the price and yield performance of the Real Estate Select Sector Index. It aims to effectively represent the S&P 500 Index real estate sector. It seeks to provide its investors with precise exposure to companies from real estate management and development and REITs, except mortgage REITs. This offers investors strategic or tactical positions when it comes to diversification as it gives a more targeted level than traditional style-based investing.

The fund is the biggest on the list, with assets under management of $4.46 billion, and offers one of the cheapest expense ratios of 0.10%, which makes it very attractive to investors seeking to lower their costs. It has a 5.95% return since inception, a 3-year return of 4.76%, and a fund distribution yield of 3.8%. Its top holdings consist of:

Why do we like it?

The ETF is great for investors seeking to increase their exposure to the US real estate market. With the ETF offering a very low cost and low tracking error (deviation to its benchmark) with good distribution yield, it makes the ETF a great candidate for investors looking to diversify into the Real Estate sector.

REIT ETF FAQ

What is the best REIT ETF?

In terms of preservation, dividend yield, 3-year performance, and diversification, we feel the best REIT ETFs are:

  1.   The Invesco S&P 500 Equal Weight Real Estate ETF (RSPR)
  2.   JPMorgan Realty Income ETF (JPRE)
  3.   Vident US Diversified Real Estate ETF (PPTY)
  4.   Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
  5.   Real Estate Select Sector SPDR Fund (XLRE)

Are REITs ETFs a good investment?

REIT ETFs offer a more attractive dividend than bonds. Moreover, they offer investors instant diversification by holding a basket of REITs to reduce portfolio risk.

Are REITs better than ETFs?

Investors who buy REITs are buying an individual real estate investment trust. However, when investors buy REIT ETFs buy a portfolio of REITs, they get the advantage of having instant diversification that can help mitigate risk.

What are the most popular REIT ETF providers?

The most popular REIT ETFs are provided by:

Final Thoughts

Finding the best REIT ETF for your portfolio boils down to your investment goal and the diversification you seek. Investors can mix and match combinations to get additional domestic real estate market exposure or even go international with REIT ETFs with these holdings. However, those looking to pick a sector to outperform the overall real estate sector need only look at a more specialized REIT ETF.

Disclaimer: Distribution yields and performance data are coming from the fund pages. The author is not a holder of any of the above-listed REIT ETFs.

Other Dividend Lists

The following lists contain many more high-quality dividend stocks:

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.



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