The world of REIT ETF’s

On a walk not too long ago, we were discussion our real estate options. We looked at the current real estate valuations, interest rates, personal preferences and….. are lost what to do. Real estate is extremely expensive (relative and absolute) and good deals are very, very hard to find. Yes, we could become more active in the scene, or change investment styles, but both are not our thing. We could also accept a lower ROI (working on it, not there yet!).

What are our other options? We still provide temporary real estate loans/mortgages to other investors with higher interest rates, but those are hard to find and not very stable in terms of income. We might continue, but it all depends on what happens in that particular market segment. Which brings the next level up, which is investing in REIT’s (“Real Estate Investment Trusts”). Or another level up, investing in the world of REIT ETF’s! What are (some of) our (and your) options if you want to “indirectly” invest in real estate and have diversification at that same time?

The world of REIT ETF's
The world of REIT ETF’s: The big apple you want a piece of!

How do REIT’s work?

What are REIT’s? Our friends from Investopia have a good short explanation: “A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modelled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves”

Sounds like a lazy man’s way to invest in real estate! We are lazy, so we like REIT’s. We have several in our dividend portfolio. Albeit usually not the best dividend growth investments, they generally have higher yields and pay monthly dividends to their shareholders. We especially like the latter as it feels like you still have that steady income from physical real estate and it nicely resembles a pay-check. Yes, something to do with personal finance and preferences.

What qualifies as a REIT?

Another quick note on what qualifies as a REIT from Investopia:

To qualify as a REIT (for the US), a company must comply with certain provisions in the Internal Revenue Code (IRC). These requirements include to primarily own income-generating real estate for the long term and distribute income to shareholders. Specifically, a company must meet the following requirements to qualify as a REIT:

  • Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
  • Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
  • Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
  • Be an entity that’s taxable as a corporation
  • Be managed by a board of directors or trustees
  • Have at least 100 shareholders after its first year of existence 
  • Have no more than 50% of its shares held by five or fewer individuals

Note bullet 3, a REIT needs to pay out 90% of it’s taxable income by law. This is the main reason why REIT’s typically provide a higher yield, which is great for people that don’t like the 4% rule during their FIRE years (read: sell capital to cover expenses). Albeit it is not necessarily a great thing when you look at inflation (many REIT’s don’t increase their dividends each year). But if you get 6% per year, use about 4% and reinvest the other 2%, you get a long way.

REIT Markets

As you can imagine, real estate is required for every business type and for living in general. REIT’s can therefore consist of real estate in one of more market segments. You can think of the following:

  • Housing
  • Commercial spaces
  • Retail spaces
  • Industrial spaces
  • Self storage units
  • Medical Properties
  • Agricultural plots, and more

Some REIT’s focus on one real estate area, some mix multiple real estate segments into one endeavour.

Besides directly investing in real estate (the equity type), you also have REIT’s that only hold mortgages for real estate (the mortgage type). And again, like with most things, you can blend it together and have hybrids that do both.

In short, you can find REIT’s in many flavours. But each REIT is a company and you would need to dive into the numbers to find the REIT’s that are right for you (and make you the most money). For example, one of the famous ones for the dividend growth lovers among you is Realty Income (ticker “O”). O is primarily a retail REIT (~84%), with some industrial and office exposure on the side. It has 6500+ units, 600+ tenants and is active in 2 different countries. With this large a number of units and tenants, you can imagine that the distribution within the retail sector is pretty much covering all segments.

But research takes times and effort for each company/REIT. So be lazy, buy a REIT ETF (or two) and be done with it! All the benefits of REIT’s, but without the regular research and checking of performance, etc. Right?!

The world of REIT ETF's
The world of REIT ETF’s – What to consider?

REIT ETF’s

Similar to VWRL, VTI, VXUS (and all the others out there), REIT ETF’s are financial products that bundle multiple companies into one package that you can trade all day long. The management company that makes (and maintains) these ETF bundles charges you a management fee for that service.

But you have to be careful when selecting ETF’s for your portfolio. It’s recommended that you (at the least) check the following parameters before making a selection:

  • Is the ETF a direct or indirect product? Read: when you by the ETF, do you obtain (through the ETF) direct ownership of the REIT, or are you buying a derivative/replication product? The latter does not have my preference, too risky for my taste and fees are generally higher too.
  • How big is the fund? This will (partially) determine the amount amount of trades that are made and therefore the spread between buy and ask prices. You want this Ask/Bid spread to be as small as possible, so you can buy/sell at the prices you think is acceptable (or good).
  • Some have very acceptable MER (Management Expense Ratio’s)/TER (Total Expense Ratio’s), some are wildly off (1% and more). Everything below about a 0.5% MER is good, everything below 0.25% MER is great (personal opinion here).
  • Is the ETF trading above or below the REIT index that it might be following? You want to obviously buy lower if you can.
  • What is the distribution in terms of the various real estate segments and countries? If you don’t want exposed to say retail or commercial units, or certain countries, you have to screen your REIT ETF’s for that specifically (or go back to buy specific REIT’s).

An encompassing overview of various REIT’s and real estate funds that are out there can be found here. Note that some require as much as $1.000.000 as a minimum investment! But that’s peanut for you, right?

Not all rainbows and unicorns

Many REIT’s and most REIT ETF’s haven’t had a great time lately. The Corona crisis really affected the hotel, commercial and retail REIT’s hard (we know, still hurts; fortunately we don’t have hotel REIT’s though!). But data centres and Industrial REIT’s did rather good. Some interesting articles on the state of REIT’s can be found on Seeking Alpha here and here.

With the drop in interest rates, REIT’s (and associated ETF’s) have done rather well the past few decades. But there seems to be limited upward movement in general for REIT’s. It’s really an investment you want to have for the dividend/cashflow, not growth. Albeit a recovery from the corona carnage is still to materialise.

Also, valuations have gone up over the years, partially triggered by the steady drop in interest rates. If/when these will go up, it will affect the prices and returns of REIT’s and associated ETF’s.

An overview of some REIT ETF’s

I’ve made a quick overview of several REIT ETF’s. I’ve selected (some of the) largest in Canada, the USA and on the global stage. The various ETF’s are hyperlinked to the issuer spec pages for you to check out the details.

For more broad screening and general information, you can also visit www.etf.com, www.etfdb.com and similar sites.

TickerIssuerREIT CountryInception ETFNr of HoldingsMarket CAPYieldDateMERP/EAverage Annual Return Since Inception
XRE-TIshares/BlackrockCanada2002-10-1723     1,000,000,0004.70%2020-09-020.61%7.38.4%
RIT-TFirst Asset Investment Management IncCanada (93%)/USA(7%)2004-11-1536         560,000,0005.32%2020-09-040.87%7.89.7%
ZRE-TBMOCanada2010-05-1924         510,000,0005.80%2020-09-040.61%7.88.2%
VRE-TVanguardCanada2012-11-0116         228,000,0006.65%2020-09-040.39%7.54.3%
           
VNQVanguardUSA2004-09-23181   57,500,000,0003.73%2020-09-040.12%41.17.9%
SCHHCharles SchwabUSA2011-01-13146     4,350,000,0003.25%2020-09-040.07%40.66.7%
IYRIshares/BlackrockUSA2002-06-12116     3,490,000,0003.19%2020-09-040.42%59.68.9%
           
REETIshares/BlackrockInternational2014-07-08315     2,100,000,0006.13%2020-09-040.14%28.51.6%
RWOState Street Global AdvisorsInternational2008-05-07259     1,570,000,0004.70%2020-09-040.50%24.42.3%
RWXState Street Global AdvisorsInternational – Ex USA2006-12-15142         922,000,0003.24%2020-09-040.59%18.4-0.2%
           
TRETVan EckInternational2011-04-14100           89,373,5814.59%2020-09-170.25%??7.1%
NTDREAENORTHERN TRUST ASSET MANAGEMENTInternational2015-03-11339     1,200,000,0003.80%2020-08-310.12%19.0-0.1%
AVIVE.ASActiamEurope2018-02-2253              4,280,0693.90%2020-09-170.30%??6.7%
SREEEX.DEIshares/BlackrockEurope2006-09-1939           56,137,3602.01%2020-09-170.46%10.28.0%

Discussion

Quick disclaimer, we don’t own any of the above ETF’s. We actually don’t own any REIT ETF’s at the time of writing this post. As noted in the introduction, I actually wrote the post as a result of some digging around in the world of REIT ETF’s. I didn’t know what to expect. But I was hoping for high yield/good cashflow investments obviously.

A quick glance at the overview above provides some general insights. Older REIT ETF’s generally outperform the newer ones (notable exception is RWX, which lost money since inception). Which suggests to me that the years after the 2008-2009 financial crisis have not done the REIT sector (in general) any favours. Even despite the drop in interest rates since that time.

US yields are relatively low, but MER’s are very low too. PE ratio’s are actually high, which does not seem to make investing from a dividend/cashflow perspective very appealing at this time.

Investing in Canada does not seem to be too bad. The MER’s are higher that I would like them to be, yields are very acceptable is you focus purely on dividends/cash-flow. But you are limited to one country only, with a relatively limited number of REIT’s in each ETF. Still, might be worth considering.

Favourite?

That brings me to my current “favourite” of the ones reviewed, which is REET. It’s got a a reasonable international distribution as well as by sector. It’s been hammered and has not recovered even close to previous high’s, so there might be some upward potential. The trailing yield is pretty good (SEC 30 day yield is still reasonable), MER is low and it’s big enough to have a limited Ask/Bid spread.

There are some “downsides” though too. It’s noted in USD, which makes it’s cash-flow in € somewhat more variable. It’s heavily centered around the USA (about 65.9% of the REIT’s are from the USA) with other country exposure to Japan (9.4%), UK (5.5%), Australia (4%), Singapore (3.5%) and Canada (3.25%). So limited to no exposure to the mainland of Europe. There is no exposure to South America, Africa or Asia (outside Hong Kong and Singapore).

Am I going to buy this? No, not yet anyways. I still would like to dig around some more. I would like to focus on what is available in € (likely not much, most will likely be replicated ETF’s).

Note 2019-09-18: I’ve added 4 ETF’s that can be traded in Euros to the overview. The one from Northern Trust seems to be the one to go with if you want diversification, decent yield, low fees and good spread. That being said, the ETF performance since inception is horrible….

What do you think of the world of REIT ETF’s? Any recommendations or things I should look at? Looking forward to your feedback on this!

11 Comments

  1. A very lazy way to own REITs? Stock indices contain REITs, and hence do broad market stock ETFs. (Want higher yield? High dividend ETFs, maybe? Should also contain more REITs compared to broad market ETFs.)

    1. Albeit you are right, the point was to find something purely real estate related as a replacement for actual real estate. Hence the REIT or REIT ETF as an alternative option.

  2. Although I do not own REITs myself, I do own an index fund “NT DEVELOPED REAL ESTATE INDEX FGR FND” that tries to mirror the “FTSE EPRA/NAREIT Developed Index”.
    ISIN NL0010948246.
    After careful consideration I liked this one because: 0,12% cost, In EUR. And there is almost no competitive advantage between funds, except for costs…

  3. Hmm, but these are mainly US funds which you can’t buy (easily) anymore in the Netherlands?

    Plus since REIT’s distribute quite some income it may also lead to a lot of dividend leakage. Isn’t it more logical to look at the Dutch ‘REIT’ options from VanEck, Actiam, Northern Trust, NN, etc.?

    1. Fair point, when I find some time in the near future, I’ll have a look at some of the Dutch options. Might update the post to show some of the results.
      Thanks for the comment.

      1. “VanEck Vectors Global Real Estate UCITS ETF” ISIN NL0009690239 is in the “free of charge” list of DeGiro. Also 0.3% annual management fee.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.