REITs vs. REIT ETFs: How They Compare (2024)

REITs vs. REIT ETFs: An Overview

Real estate investment trusts (REITs) are companies that own and operate real estate to produce and generate income. Investors can purchase shares in REITs, which represent ownership of an individual real estate company, just like regular stocks. The individual performance of REITs can vary widely. Many REITs are traded on major stock exchanges, but there are also a number of private and non-publicly traded REITs.

REIT exchange traded funds (ETFs), on the other hand, invest their assets primarily in equity REIT securities and other derivatives. They often have low expense ratios and passively track indexes for the larger real estate market. These REIT indexes include a number of different types of REITs as components. By tracking an index, an investor can gain exposure to the larger real estate sector without having to risk capital on one individual company.

More sophisticated real estate investors may wish to invest in a single REIT. The investor may want to focus on a REIT with good management, a strong business plan, or a focus on a certain portion of the real estate sector. But for any investor who does not want to perform due diligence on a number of different REITs, REIT ETFs may provide an easy way to gain diversified exposure to real estate in one trade.

REITs

As noted above, REITs own and operate real estate properties to produce and generate income, and offer shares on the public and private market to investors. There are three main types of REITs: Equity REITs, mortgage REITs, and hybrid REITs. Each brings a different scope to the table—from investment base to risk. Investors need to weigh out their investment goals before they decide to put their money into any one of these REITs.

Equity REITs

Nearly 90% of all REITs are equity REITs. Real estate investment trusts in this category own or invest directly in real estate properties that are income-producing. This means the revenue they generate comes directly in the form of rental income earned from those properties. Properties range from shopping centers, apartment and condominium buildings, corporate office spaces, health care homes, and even storage spaces. According to reit.com, more than $2 trillion in real estate assets are owned by equity REITs.

These REITs are required to pay out a minimum of 90% of their income to shareholders in the form of dividends.

Mortgage REITs

Mortgage REITs invest in property mortgages. Some mREITs, as they are commonly called, may buy mortgage-backed securities (MBS)—both residential or commercial MBSs. Others buy or originate mortgage offerings to borrowers and property owners. These REITs make money from the interest from price appreciation in the value of the MBS or from the interest collected from mortgage loans.

These REITs provide investors with access to the mortgage market while giving them the liquidity and transparency of the public equities.

Hybrid REITs

These types of REITs comprise the smallest percentage of the REIT sector. They are a combination of equity and mortgage REITs. They invest directly in both properties and mortgage loans. By investing in hybrid REITs, investors get the benefit of both equity and mortgage REITs in one asset. Although they may invest in both physical real estate and mortgages/MBSs, they are usually weighted more heavily in one over the other.

Investing in hybrid REITs comes with very low volatility and regular income that comes from property appreciation and dividend payouts.

Tax Advantages of REITS

REITs do not have to pay income taxes if they comply with certain federal regulations. REITs must distribute at least 90% of their taxable income annually to shareholders as dividends and distributions. At least 75% of the REITs’ assets must be in real estate, cash, or U.S. Treasuries, with at least 75% of the income coming from rents, mortgages, or other real estate investments.  REIT shares must be held by a minimum of 100 stockholders.

REIT ETFs

REIT ETFs invest the majority of their funds in equity REITs and other related securities. As noted above, these investments are passively managed around indexes of publicly-traded owners of real estate. They are generally known for and favored by investors because of their high dividend yields.

REIT ETFs resemble both equities and fixed income securities, providing very consistent income for investors. These kinds of assets must pay out the majority of their income and profits to shareholders on an annual basis.

Examples of REITs and REIT ETFs

REITs

American Tower REIT (AMT) is one of the largest REITs in the world by market capitalization, which was $111.97 billion as of May 2021. Launched in 2012, it manages infrastructure properties, including more than 183,000 pieces of multitenant communications real estate. Put simply, the company owns and operates broadcast and wireless communications equipment and infrastructure around the world.

The REIT reported a 8.3% increase in revenue for the first quarter of 2021 to $2.159 million, as well as an increase in net income by 55.8% from the same period in 2020 to $652 million. As of May 16, 2021, the REIT was trading at about $244 per share, and offered a dividend yield of 2.01%.

Simon Property Group (SPG) is one of the largest REITs in the United States. It owns and operates retail properties across North America, Europe, and Asia including shopping centers and premium outlets. Simon was trading at about $122.18 as of May 16, 2021, with a market cap of $40.14 billion. Simon offered a dividend yield of 4.26%.

For the first quarter of 2021, SPG reported total revenue of $1.24 billion, a decline of $113.40 million from the same period in 2020. Consolidated net income increased from $505.40 million in the first quarter of 2020 to $510.46 million in its 2021 counterpart.

REIT ETFs

The Vanguard REIT ETF (VNQ) is the one of the largest REITs in the sector and began trading in 2004. It invests in stocks issued by REITs and seeks to track the MSCI U.S. REIT index, the most prominent REIT index. VNQ had $72.8 billion in assets under management (AUM) as of May 16, 2021, with a very low expense ratio of 0.12%. It pays an attractive dividend of over 4.24%.

The fund has 174 stocks in its holdings. The top 10 largest comprised 44.9% of the fund’s net assets. Specialized REITs had the largest allocation of holdings at 37.7%, with 13.8% of the fund's holdings in residential REITs and 10.0% in retail REITs. VNQ returned 13.52% for the three years prior to April 30, 2021, and was up 9.02% since its inception in September 2004.

The iShares U.S. Real Estate ETF (IYR) is another large REIT ETF. IYR tracks the Dow Jones U.S. Real Estate Index. It began trading in 2000 and had $4.98 billion in management as of May 16, 2021. IYR has an expense ratio of 0.42%, which is higher than that of VNQ. The fund had 86 components and paid a dividend yield of 2.08% as of May 16, 2021. Shares of IYR returned 12.82% over the three years prior to April 30, 2021, and returned 9.81% since inception. IYR's shares trade on the New York Stock Exchange (NYSE).