REIT ETF Explained: What Are REIT ETFs?

Real Estate Investment Trusts (REITs) and REIT ETFs provide investors with exposure to the real estate market without the need to directly manage properties. While REITs own or finance real estate, REIT ETFs invest in a diversified portfolio of REITs, offering varied exposure to the sector. It's important to distinguish these from REIT ETF CFDs (Contracts for Difference), which are derivatives allowing investors to trade on the price movements of REIT ETFs without owning the underlying assets.

TLDR

• REIT vs. REIT ETF: REITs directly own or finance properties, while REIT ETFs invest in a REIT portfolio, offering diversified market exposure.
• CFD Distinction: REIT ETFs involve actual ownership of fund shares, whereas REIT ETF CFDs are derivative products with which you speculate on price movements.
• Investment Options: Vanguard Real Estate, iShares Cohen & Steers REIT, and SPDR Dow Jones REIT ETF are examples of popular REIT ETFs CFDs available for trading with Plus500.

What is a REIT?

Real Estate Investment Trusts specialise in profit-generating real estate holdings across various sectors. They allow investors to earn income from real estate without directly buying, managing, or financing properties. Established by a 1960 U.S. law, REITs were designed to make real estate investment accessible to smaller investors, enabling them to invest in portfolios of properties like skyscrapers, shopping malls, or apartment complexes with the ease of purchasing stocks.

By pooling capital from multiple investors, REITs have played a significant role in the development and funding of American real estate. Most REITs are publicly traded, providing investors with liquidity similar to that of stocks while offering a steady income stream. However, REITs typically offer limited capital appreciation. While the majority of REITs are publicly traded, some are private and only available to accredited investors. REITs can invest in diverse property types, including apartment buildings, offices, shopping centres, and warehouses.

What Is a REIT ETF?

An REIT ETF is an exchange-traded fund that primarily invests in equity REIT securities and related derivatives. These ETFs are passively managed, meaning they are built to track publicly traded real estate company indexes.

A notable feature of these ETFs is their "top-heavy" nature, where larger REITs constitute a significant portion of the fund's assets. Investing in REIT ETFs offers a way for investors to gain exposure to the real estate market without the complexities of direct property ownership.

As mentioned above, REITs combine the characteristics of equities and fixed-income securities, providing investors with steady dividend income due to their requirement to distribute a majority of profits annually. REIT ETFs often include holdings in REITs that own income-generating properties such as warehouses, apartments, and hotels.

However, there is broad diversity within this financial instrument category, and different funds may focus on various segments of the real estate market, including commercial mortgages and higher-risk areas. Understanding the underlying assets and their performance history is essential when considering an investment in REIT ETFs or their overlying CFDs.

Main Types of REITs

Under the wider umbrella of real estate investment trusts, there are three general types which the interested investor should understand—Equity REITs, Mortgage REITs, and Hybrid REITs. Let's take a look at the unique characteristics of each:

Equity REITs

• Equity REITs represent the largest segment of the REIT market, and are estimated to comprise nearly 90% of all REITs.
• These REITs own and invest directly in income-producing real estate properties, generating revenue primarily from rental income.
• Equity REITs typically invest in various property types, including shopping centres, apartment complexes, office buildings, healthcare facilities, and storage spaces. They are required to distribute at least 90% of their income to shareholders as dividends.

Mortgage REITs

• Mortgage REITs (mREITs) invest in property mortgages and mortgage-backed securities (MBS), including both residential and commercial MBS.
• These REITs earn income from mortgage loan interest or from the appreciation in the value of the MBS they hold.
• Mortgage REITs offer investors exposure to the mortgage market, providing liquidity and transparency similar to public equities.

Hybrid REITs

• Hybrid REITs combine elements of both Equity and Mortgage REITs, investing in both real estate properties and mortgage loans.
• These REITs offer the benefits of both types, providing regular income from property appreciation and dividend payouts while typically being weighted more heavily towards one aspect (either equity or mortgage).
• Hybrid REITs are generally characterised by low volatility and offer investors a diversified approach to real estate investing.

What Is an ETF?

An exchange-traded fund is a type of investment fund that pools various securities and trades on an exchange, similar to a stock. There are many types of ETFs. These can track a wide range of assets, from commodities to indices, and can be designed to follow specific investment strategies and participate in specific market sectors. Investors use ETFs for income generation, speculation, and risk management. Unlike mutual funds, which trade once daily, ETF prices fluctuate throughout the trading day. ETFs are known for their low expense ratios and reduced broker commissions. The first ETF, SPDR S&P 500 ETF (SPY), tracks the S&P 500 Index, offering investors a way to diversify their portfolios.

How Does an REIT ETF Work?

An REIT ETF operates by pooling investor funds to buy shares in a range of Real Estate Investment Trusts (REITs), which are companies that own or finance income-producing real estate. The ETF then trades on a stock exchange, allowing investors to buy and sell shares throughout the trading day.

REIT ETFs track a specific index designed to mirror the performance of a collection of REITs. The ETF's value fluctuates based on the performance of the underlying REITs, which generate income through activities such as renting or leasing properties. These REITs must pay out the majority of their income as dividends, which is then passed on to ETF shareholders.

The mechanics of an REIT ETF involve automatic adjustments to align with its target index, often resulting in a concentration of larger REITs in the portfolio.

What's the Difference Between REITs and REIT ETFs?

REITs and REIT ETFs both provide avenues for real estate investment without the need for direct property management, but they differ significantly in structure, investment style, and trading methods.

• Structure: REITs are typically structured as corporations and are required to distribute 90% of their taxable income as dividends. They directly own and manage real estate properties (Equity REITs), mortgages (Mortgage REITs), or a combination of both (Hybrid REITs). In contrast, REIT ETFs function similarly to mutual funds, holding a diversified portfolio of REITs rather than owning properties directly. The ETF structure pools investor funds to invest in various REITs, with fund managers determining the specific holdings.
• Investment Style: REITs can be actively or passively managed, with active management potentially offering higher returns but with greater risk. REIT ETFs, often passively managed, aim to replicate the performance of a specific index, providing broader market exposure with generally lower fees and reduced risk compared to individual REITs.
• Trading: REITs can be publicly traded, public but non-traded, or private, with varying degrees of liquidity and regulatory oversight. REIT ETFs, however, are traded on stock exchanges like individual stocks, allowing investors to buy and sell shares throughout the trading day with fluctuating prices. This provides greater liquidity and flexibility for investors compared to non-traded or private REITs.

Leading REIT ETFs CFDs You Can Trade on Plus500

Now that we've learned what REIT ETFs are and how they work, let's take a look at some REIT ETFs that are available for CFD trading with Plus500:

• Vanguard Real Estate (VNQ): VNQ offers broad exposure to U.S. real estate investment trusts covering a diverse range of property sectors.
• ICF iShares Cohen & Steers REIT (ICF): ICF targets large-cap U.S. REITs, providing focused exposure to high-quality real estate companies with a strong presence in sectors like retail, residential, and industrial properties.
• SPDR Dow Jones REIT ETF (RWR): RWR tracks the performance of U.S. REITs as represented by the Dow Jones U.S. Select REIT Index, with a focus on companies involved in the ownership and operation of commercial properties.
• SCHH Schwab US REIT (SCHH): SCHH provides investors with low-cost access to a broad array of U.S. REITs, emphasising a diversified approach across different property sectors while maintaining a competitive expense ratio.

How Can I Trade REIT ETFs CFDs on Plus500?

• Take Time to Learn: Make use of learning resources like the Plus500 Beginners' Guide in order to get a solid understanding of CFD trading before your next steps, and put what you've learned into practise with our free, unlimited demo mode.
• Make It Official: Complete the registration process with Plus500, get verified, and make the first deposit into your CFD trading account.
• Start trading: Using the Plus500 trading platform's search tool, find the REIT ETF CFD you're interested in trading. With the new information and practise you've acquired, find your preferred REIT ETF CFD on the Plus500 platform's search tool, analyse the state of the market, and decide on pursuing a long or short strategy. Consider the inherent risks involved in CFD trading and adjust your personal trading style as needed.

Conclusion

Understanding the distinctions between REITs, REIT ETFs, and REIT ETF CFDs is crucial for informed investment decisions. While REITs and REIT ETFs provide direct exposure to real estate and its market dynamics, REIT ETF CFDs offer an avenue toward market participation without ownership, catering to different investment strategies and risk appetites. Now that you've expanded your knowledge base, you may consider trading on REIT ETF CFDs and more.

FAQs

What is the largest REIT ETF?

The Vanguard Real Estate ETF is the largest REIT ETF as measured by assets under management.

Do REIT ETFs pay dividends?

Yes, REIT ETFs typically pay dividends, as they invest in REITs that are required to distribute a majority of their income to shareholders.

Are REIT ETFs CFDs a good investment?

Whether REIT ETFs CFDs can be considered a good investment depends on the individual trader's personal strategy, risk tolerance, psychological makeup, and other factors.