At first glance, real estate investing might seem impossible to break into. For most people, their house is the most valuable thing they own. Between taxes, repairs, and maintenance, it can be expensive to own a home! How are you supposed to afford an investment property?
Real estate investment trusts (REITs) are a solution to that problem. An REIT is a company that owns and develops real estate. Different REITs specialize in various types of properties, such as apartments, commercial properties, hotels, offices, and industrial spaces.
REITs are required by law to disburse 90% of their taxable income in the form of shareholder dividends, and the business is heavily regulated by the SEC.
When you buy shares in real estate funds, you don鈥檛 purchase ownership of the property. But it鈥檚 effectively the same thing since you get a cut of the profits from the property. Alternatively, you can invest in an ETF or mutual fund that includes REITs in their portfolio. That鈥檚 what we鈥檙e about to look at today.
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Top 5 Real 天博体育开户 Funds For Investors
Before we get into any specific funds, let鈥檚 talk about what makes one real estate fund better than another. With so many ETFs out there, how do you choose the one that鈥檚 right for you?
To begin with, steer clear of brand-new funds or ones with limited capital. Avoid any funds that haven鈥檛 been around for at least a year. They should also have at least $100 in assets, and they shouldn鈥檛 be heavily leveraged.
It鈥檚 also best to avoid actively-managed funds. They鈥檙e not bad if you鈥檙e a dedicated investor who loves watching the market. But if you want a long-term passive investment, a passively-managed fund is a far superior choice.
Beyond that, you should look at the following factors:
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Expense ratio
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Tracking error
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Bid to ask ratio
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Diversification
Expense ratio and the tracking error are the more important factors because they relate directly to a fund鈥檚 financial health. Bid to ask ratio and diversification are secondary, but they鈥檙e still an important consideration.
Now that we know what we鈥檙e looking for, here are five of the best real estate funds for investors.
iShares Core US REIT ETF
The iShares Core US REIT ETF is designed to track the FTSE NAREIT Equity REITs Index. It invests a minimum of 80% of its funds into assets that are either part of the NAREIT index or virtually identical to those assets.
It invests in the majority of real estate classes, except timber, mortgages, and infrastructure. As such, it has somewhat of a strong focus on REITs that invest heavily in commercial and rental properties.
Real 天博体育开户 Select Sector SPDR庐
The Real 天博体育开户 Sector SPDR is designed to track another index, the Real 天博体育开户 Select Sector Index. In this case, at least 95% of the fund鈥檚 assets are invested in REITs that are part of that index.
This is both a good thing and a bad thing. On the one hand, the index is one of the better-performing indexes out there, so it鈥檚 a good one to track. On the other hand, it鈥檚 not terribly diverse. If non-mortgage REITs take a downturn, the entire fund will go down with them.
Schwab US REIT ETF鈩�
The Schwab US REIT ETF is meant to track the Dow Jones Equity All REIT Capped Index. This index is comprised of non-mortgage, non-hybrid REITs. In other words, the REITs only invest in their own properties and don鈥檛 participate in lending.
The Schwab ETF tracks the Dow index very closely. That鈥檚 only natural since a minimum of 90% of its assets are part of that index.
Vanguard Real 天博体育开户 ETF
The Vanguard Real 天博体育开户 ETF tracks the MCSI US Investable Market Real 天博体育开户 25/50 Index. This index is comprised not just of REITs but other real estate investments. Most of the fund鈥檚 assets are invested via a subsidiary company that does the actual investing. Since this ETF includes more than just REITs, it鈥檚 a bit less vulnerable to short-term market shifts.
Fidelity庐 MSCI Real 天博体育开户 ETF
This ETF is designed to track the MSCI USA IMI Real 天博体育开户 25/25 Index, and a minimum of 80% of its assets are invested in that index. This index, in turn, is intended to track the broader real estate sector.
Real 天博体育开户 Funds Vs. REITs
Before we wrap up, let鈥檚 discuss what separates a real estate fund from an REIT.
An REIT is a company that invests in profit-earning properties and distributes its profits to investors. Investors purchase shares in the company, similarly to how you buy stock in other companies.
A real estate fund, on the other hand, is a fund that owns shares in multiple REITs. Either one is ultimately involved in real estate, but there are some differences. Here are some of the others:
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REITs trade on exchanges like stocks do. The prices are updated throughout the day and are constantly changing. They鈥檙e also highly liquid, and high-volume trading is the norm.
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Real estate funds are traded via online brokerages, or you can buy them from the institution that created them. Share prices only update once a day, and trading is less liquid.
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You earn money from REIT investments in the form of shareholder dividends. Share prices themselves are typically stable.
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Real estate funds are designed to grow in value over time. They won鈥檛 provide passive income like an REIT, but they鈥檙e better long-term investments.
Summary
As you can see, real estate funds or ETFs can make great additions to your portfolio. Since they tend to grow in value along with the real estate market, they鈥檙e tied to one of the most reliable market sectors.
At the same time, it鈥檚 essential to tread carefully. Before investing, research multiple different funds and ensure you鈥檙e buying into one that matches your investment philosophy. In investing, there鈥檚 no such thing as a guarantee. But investing in the right fund is a good start.
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