5 Stunning Details About REIT ETFs Each Investor Ought to Know

“You possibly can’t polish dust,” a senior Morgan Stanley supervisor as soon as instructed Hurt Meijer, writer of the 2025 e-book Actual Property Guidelines: The Investor’s Information to Choosing Winners and Avoiding Losers in Listed Property, when he requested him about the very best actual property recommendation. It is a lesson that he says can assist these investing in actual property funding belief (REITs) exchange-traded funds (ETFs).

“With REITs, you click on on the mouse and you purchase these shares and that is it,” Meijer famous. Nevertheless, this oversimplified view can result in pricey errors. Serving to you keep away from different such errors, we take you thru 5 shocking info about REIT ETFs that many buyers overlook.

5 Stunning Details About REIT ETFs

REIT ETFs allow you to spend money on a diversified basket of firms that personal and handle income-producing properties, from workplaces to information facilities. These funds commerce like shares and sometimes supply regular dividend revenue since REITs should distribute most of their earnings to shareholders.

1. REITs Have Typically Outperformed the S&P 500 Over the Lengthy Time period

Whereas REITs have traditionally outpaced the S&P 500 index (25- and 50-year returns are higher than the inventory market), they’ve struggled comparatively previously decade, hit onerous by each the pandemic and rising rates of interest.

But, not all REIT ETFs are created equal. Specialised sectors like self-storage (up 10.9% in 2024) and information facilities (up 15.8%) have proven extra resilience than others. “It’s important to have the fitting kind of belongings,” Meijer stated. These are often “in supply-constrained areas.”

REIT ETFs enable you navigate these sector variations by offering broad publicity throughout property varieties. Under, you may see the returns for REITs in particular sectors, which provides you an concept of the returns of ETFs that maintain REITs invested in these areas.

2. REIT ETFs Are Hanging for Their Tax Effectivity

Investing in REIT ETFs might be extra tax-efficient than instantly proudly owning particular person REITs or bodily actual property. As a result of REIT ETFs are structured as pass-through entities, they keep away from double taxation on the company degree, permitting most of their revenue to be distributed as dividends to you.

3. Many REIT ETFs Are “Prime-Heavy”

One other attention-grabbing side of REIT ETFs is their “top-heavy” construction, the place a small variety of giant REITs dominate the portfolio’s holdings. As an example, main gamers like American Tower Corp. (AMT) and Prologis Inc. (PLD) typically comprise a major a part of these funds. This might imply your returns rely closely on how these few giant firms carry out.

4. Sensible Beta Methods Are Gaining Reputation in REIT ETFs

A lesser-known truth about REIT ETFs is that they make use of “sensible beta” methods past conventional market capitalization weighting. As a substitute of merely monitoring an index based mostly on market cap, these funds weight their holdings based mostly on dividend yield, monetary well being, or progress potential.

This strategy typically cuts down in your danger by specializing in these traits which have traditionally led to raised efficiency.

5. REIT ETFs Cowl Sudden Actual Property Sectors

Meijer stated {that a} mistake he typically sees is that buyers go along with the traditional knowledge. “For instance, folks let you know workplaces are horrible now,” he stated, however he thinks the fitting strategy typically finds vital prospects in areas different buyers would possibly shrink back from.

The identical goes for newer sectors the place you may put your capital. Right now’s REIT ETFs do not simply personal buying malls and residence buildings—they’re invested in information facilities that energy cloud computing, cell tower networks that join our telephones, and self-storage services which are remarkably worthwhile. For instance, healthcare REITs are up 33% in 2024, whereas specialty REITs have gained over 50%, exhibiting how these newer sectors are altering the actual property panorama.

Backside Line

Whereas these funds make actual property investing as simple as shopping for a inventory, sensible buyers know to look below the hood. For buyers wanting actual property of their portfolio with out the complications of being a landlord or placing their chips in a single REIT, REIT ETFs supply a sexy choice. Nevertheless, as with every funding, Meijer stated, “It’s important to do your homework.”