Table Of Content
What Is a REIT ETF?
A REIT ETF (Real Estate Investment Trust Exchange-Traded Fund) is a type of investment fund that holds a diversified portfolio of publicly traded REITs.
These ETFs allow investors to gain exposure to the real estate sector—residential, commercial, industrial, or a mix—without directly buying or managing properties.
REIT ETFs trade on major stock exchanges like regular stocks and typically offer regular dividends, as REITs are required to distribute most of their taxable income to shareholders.
For example, a REIT ETF like the Vanguard Real Estate ETF (VNQ) gives investors access to hundreds of real estate stocks in one trade.
How Does It Work?
A REIT ETF works by pooling investors’ money to buy shares of multiple REITs, which themselves own or finance income-producing real estate.
Investors benefit from the performance of the underlying real estate assets, and returns typically come from dividends and capital appreciation.
These ETFs are managed passively (tracking an index) or actively, and can focus on different sectors or geographies.
Here’s how investors might use REIT ETFs:
A retiree seeking income might invest in dividend-focused REIT ETFs for stable cash flow.
A young investor might use a diversified REIT ETF to hedge inflation and add alternative assets to their portfolio.
A real estate enthusiast who doesn’t want to deal with tenants may use REIT ETFs as a passive alternative to owning physical property.
Residential vs. Commercial REIT ETFs: Which Is Better?
The better choice depends on your investment goals and risk tolerance.
- Residential REIT ETFs invest in apartments, single-family rentals, and student housing. These tend to offer steady income and are often more resilient during economic downturns.
- Commercial REIT ETFs focus on offices, retail centers, and industrial warehouses—potentially offering higher yields but often more volatility due to business cycles and tenant risk.
For example, during the COVID-19 pandemic, many office REITs struggled due to the rise of remote work trends, while residential REITs remained relatively stable due to ongoing demand for housing.
Feature | Residential REIT ETFs | Commercial REIT ETFs |
|---|---|---|
Typical Holdings | Apartments, senior housing, rentals | Offices, malls, logistics centers |
Income Stability | Generally more stable | Can fluctuate with economic cycles |
Risk Exposure | Tied to housing market | Sensitive to business environment |
Use Case | Long-term income, defensive play | Growth potential, higher income |
How REIT ETFs Differ from Individual REITs
While both REIT ETFs and individual REITs give you access to real estate investments, their structure, diversification, and management style vary significantly.
REIT ETFs hold multiple REITs, spreading risk across property types and companies.
Individual REITs focus on a specific sector (e.g., retail, healthcare), offering targeted exposure but less diversification.
REIT ETFs are usually passively managed and track a real estate index.
Individual REITs require deeper research and monitoring but may offer higher yield opportunities.
For example, if you buy a single healthcare REIT, your returns depend heavily on that sector’s performance.
But if you own a REIT ETF like VNQ, you’re exposed to over 150 different REITs, including industrial, office, and residential properties.
Feature | REIT ETF | Individual REIT |
|---|---|---|
Diversification | Broad exposure | Focused on specific sector/property |
Research Required | Minimal | High |
Volatility | Lower (due to diversification) | Higher (sector-specific risks) |
Yield Potential | Moderate | May be higher, but riskier |
REIT ETFs vs. Real Estate Crowdfunding
REIT ETFs and real estate crowdfunding both offer real estate exposure without owning physical property, but they differ in liquidity, accessibility, and structure.
REIT ETFs trade on public markets and can be bought or sold anytime.
Crowdfunding platforms typically require you to lock in capital for years.
REIT ETFs are more liquid and regulated by the SEC.
Crowdfunding offers direct investment into individual projects with potentially higher returns.
For instance, with a REIT ETF like SCHH, you can buy and sell shares daily through your brokerage account.
But with crowdfunding platforms like Fundrise or RealtyMogul, your money might be tied up in a private deal for five or more years.
Feature | REIT ETFs | Real Estate Crowdfunding |
|---|---|---|
Liquidity | High (tradeable daily) | Low (long lock-up periods) |
Investment Minimum | Often under $100 | Typically $500–$5,000 |
Regulation | SEC-regulated | Varies by platform |
Transparency | Publicly traded & priced | Private market, less transparent |
Tax Considerations for REIT ETF Investors
Investing in REIT ETFs comes with unique tax rules that can impact your overall returns—especially if held in taxable brokerage accounts.
Most REIT ETF dividends are non-qualified, meaning they are taxed at ordinary income rates, not the lower long-term capital gains rate.
A portion of dividends may be classified as return of capital, which lowers your cost basis but isn't taxed immediately.
If the REIT ETF is held in a tax-advantaged account like an IRA or 401(k), taxes on dividends and capital gains are deferred or eliminated depending on the account type.
Some REIT ETFs issue Form 1099s at tax time, but the breakdown of dividend types can vary significantly by year and fund.
Best REIT ETFs for Passive Income and Growth
Some REIT ETFs stand out for offering reliable income and long-term appreciation. Here are a few worth exploring, depending on your goals.
Vanguard Real Estate ETF (VNQ) – Tracks a broad index of U.S. REITs across various sectors. It’s a favorite for long-term investors seeking diversification and yield.
Schwab U.S. REIT ETF (SCHH) – A low-cost ETF focusing on real estate sectors excluding mortgage REITs. Good for those prioritizing cost efficiency.
iShares Cohen & Steers REIT ETF (ICF) – Targets large-cap REITs with higher growth potential. Suitable for growth-focused investors.
iShares Residential and Multisector Real Estate ETF (REZ) – Focuses on residential and healthcare real estate. Useful for investors seeking defensive sectors.
Global X SuperDividend REIT ETF (SRET) – Prioritizes high-yield REITs globally. Ideal for retirees or income-seeking portfolios.
Hoya Capital High Dividend Yield ETF (RIET) – Offers exposure to both REITs and real estate services firms, with a tilt toward dividend yield and diversification.
For example, a retiree might opt for SRET or RIET for a monthly income, while a younger investor might choose VNQ or ICF for long-term growth and sector diversification.
ETF Name | Ticker | Focus Area |
|---|---|---|
Vanguard Real Estate ETF | VNQ | Broad U.S. real estate market |
Schwab U.S. REIT ETF | SCHH | U.S. equity REITs (excludes mortgages) |
iShares Cohen & Steers REIT ETF | ICF | Large-cap growth-oriented REITs |
iShares Residential & Multisector ETF | REZ | Residential, healthcare, and self-storage |
Global X SuperDividend REIT ETF | SRET | High-yield global REITs |
Hoya Capital High Dividend Yield ETF | RIET | U.S. REITs + real estate services |
FAQ
REIT ETFs are generally better suited for long-term investing, especially for income and diversification. Short-term performance can be volatile due to market sensitivity.
Some REIT ETFs include mortgage REITs (mREITs), while others exclude them. Always check the fund's holdings or prospectus to see if it includes mREITs.
Most REIT ETFs pay dividends quarterly, though some pay monthly. Dividend frequency and consistency depend on the underlying REITs in the fund.
Yes, you can buy international and global REIT ETFs that invest in real estate markets outside the U.S. These can offer additional diversification but may involve currency and geopolitical risks.
Most REIT ETFs pay dividends quarterly, though some pay monthly. Dividend frequency and consistency depend on the underlying REITs in the fund.
REIT ETFs can help hedge against inflation because real estate often appreciates and rents tend to rise over time. However, inflation protection is not guaranteed.
Yes, REIT ETFs are commonly held in Roth IRAs to enjoy tax-free growth and avoid taxation on dividends. This helps offset the tax-inefficiency of REIT income.
REIT ETFs may decline in value when interest rates rise, as borrowing costs increase and real estate values may decline. However, strong rental income can offset some of the impact.
Yes, REIT ETFs are often categorized as alternative assets because they behave differently than stocks and bonds. They're commonly used for portfolio diversification.
