A REIT is a real estate income trust, and an ETF is an exchange traded fund that tracks a specific index or industry sector. Today we are looking at ETFs that track REITs.
A top REIT ETF depends on the type of real estate investing you’re interested in, including the real estate’s geographic area.
Passively investing in a top REIT ETF
One of the main reasons why investors love ETFs so much is because traditional ETFs practice passive management, leading to lower management expenses and capital gain distributions. Frequently comparable mutual funds will have higher management fees due to active management.
Investors like this passive management style because it doesn’t require an excessive amount of attention. They also turn to REIT ETFs because they allow for exposure to real estate investing without the need to own actual properties, which can be costly and difficult to manage.
Looking for liquidity in the top REIT ETF investments to buy
One of the first characteristics to look for in a top REIT ETF is its liquidity. The term “liquidity” refers to the ease and quickness of an asset being converted into cash or sold on the open market. ETFs can be easily traded during market hours. High volume ETFs tend to be more liquid than low volume ETFs.
There are certain factors to look for when considering the liquidity of an ETF. First, it’s important to look at the composition of the ETF. For instance, in REIT ETFs, the composition may involve commercial real estate holdings, while another may be composed of residential real estate holdings. Highly specialized ETFs are likely to offer lower liquidity.
Looking at the trading volume is the next step, an ETF with a lower trading volume is likely to have a higher spread between the bid and ask price. The last consideration to make is about the investment environment. Do you feel confident in the economic, social, political, and financial conditions associated with the investments you’re going to buy? It is important to feel positive about these areas to be confident in the investment itself.
Investing in a top REIT ETF on costs and management
Before buying a top REIT ETF, ensure that you’re familiar with the company managing the ETF. You should be aware of their track record and feel that the company will continue to make the right moves to benefit their shareholders. A good REIT ETF that fits this description can ultimately help add stability to your portfolio.
Investing in REIT ETFs are an excellent idea for investors who are new to REITs in general. The ETFs will be more liquid than attempting to sell real estate property. Some additional benefits of REIT investing include low minimum costs, mandatory distributions to investors, and dividend payments.
Understand some disadvantages of REIT ETF investing as well
Even with all the upside, no investment is without some drawbacks. For REIT ETFs, one of the drawbacks is limited growth because of the 90% rule. This rule, which requires REITs to distribute 90% of their income as dividends to shareholders is why REIT ETFs pay out dividends to their shareholders, leaves the REIT with little money to invest in growth.
Value is another consideration to make. Some types of real estate prove to be more valuable than others, so it is vital to engage with REITs that have favorable property types and operate in popular geographic locations.
Fees and tax rates are other potential issues. Trading in and out with REITs can cost upwards of 30% of the REIT’s value, which cuts into overall profits. Taxes are also higher on REITs than on stock dividends. For instance, with dividends payments, there is a maximum of 15% for tax fees. REITs, however, are taxed at regular income rates.
A top REIT ETF can have various benefits for the right investor who wants access to real estate without all the hassle of actually owning and managing it. However, it is best to consider the disadvantages as well before buying.
Is there a top REIT ETF that you own and have been happy with as part of your portfolio?