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Real estate ETFs are exchange-traded funds that invest in the real estate market.
INDS, XLRE and RSPR are among the top-performing real estate ETFs this month.
Real estate ETFs make investing in real estate easy: You are invested in a basket of real estate securities all at once and you don't have to worry about managing a physical property.
Best-performing real estate ETFs
Pacer Industrial Real Estate ETF
Real Estate Select Sector SPDR Fund
Invesco S&P 500 Equal Weight Real Estate ETF
Pacer Data & Infrastructure Real Estate ETF
Nuveen Short-Term REIT ETF
Source: VettaFi. Data is current as of December 1, 2023 and is for informational purposes only.
Why invest in a real estate ETF?
A real estate ETF has several benefits: It offers diversification, liquidity, passive income potential, and may serve as a hedge against inflation amid stock market volatility.
Real estate is well known as a path to increasing wealth, and real estate ETFs make it easier to get into the sector than buying traditional real estate.
Real estate ETFs vs. REITs
Real estate ETFs are exchange-traded funds that invest in the real estate market. And while real estate ETFs can be structured in several ways, most invest in real estate investment trusts, or REITs.
REITs are companies that own (and often operate) real estate, such as apartments, warehouses and hotels. Many REITS have a track record of paying dividends.
REITs buy and operate property; REIT ETFs invest in shares of REITs. The benefit of a REIT ETF over a regular REIT is that you’ll get many REITs in one when you invest in a REIT ETF, similar to investing in an index fund composed of many stocks, versus one single stock.
» Learn more: REITs
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Pros and cons of real estate ETFs
Protection against inflation: During times of heavy inflation, real estate can act as a hedge against rising prices. Real estate rents tend to rise at the same time as other prices, meaning those rising rent prices protect your money’s purchasing power.
Diversification: If you invest in a rental property, not only do you have to take care of that property, but if something happens to it, you may lose your investment. With a real estate ETF, you’re invested in several companies that own real estate. If something happens to one of the properties you’re invested in, you’re bolstered by the others.
Income: REITs are required to pay out at least 90% of their income as dividends. Because real estate ETFs mostly invest in REITs, they also tend to pay out high dividends.
Liquidity: ETFs can be bought and sold throughout the trading day like stocks. Real estate ETFs also benefit from this liquidity; traditional real estate does not.
Affected by interest rates: Since the underlying asset in a real estate ETF is real estate, these ETFs can be affected by interest rate hikes. When interest rates rise, as they have over the past year, it becomes more expensive to borrow money to build or buy houses. For example, mortgage applications have been decreasing as the 30-year fixed mortgage rate increased to 6.52% — the highest it's been since mid-2008.
Potential capital gains tax: The dividends paid out by real estate ETFs may be treated as taxable income. Investing through a Roth IRA can help combat those taxes, because if those dividends are reinvested, they grow tax-free.