By Jeff Reeves, MarketWatch
Real estate remains one of the most popular assets for U.S. investors. But most have a hard time buying because of the upfront dollars involved.
ETFs can be the next best thing for small-time investors looking for real-estate exposure:
Sure, those investors can always buy Real Estate Investment Trusts, or REITs, that allow anyone with a brokerage account and as little as a hundred bucks the ability to play different real-estate segments. But these stocks are a special class of company with unique accounting quirks, among them a mandate to deliver 90% of taxable income back to shareholders as well as the capital-intensive nature of purchasing and maintaining properties and the general notion that real estate as an asset that doesn’t depreciate like a piece of machinery. That means traditional Wall Street metrics such as earnings aren’t as helpful in assessing the health of a stock, and investors must learn new terminology and analysis of things like adjusted funds from operation to truly pick stocks in this sector.
And even then, there’s a chance of losing a bundle by picking the wrong stock at the wrong time.
If you’re looking for exposure to real estate but don’t have a lot of cash or a lot of stomach for risk, then ETFs may be the best fit. There’s built-in diversification, there’s no learning curve about a new form of analysis and they’re accessible to investors who simply don’t have the means to buy a bunch of physical properties.
Here are a few options that offer real-estate investments for the rest of us.
Vanguard U.S. Real Estate ETF
The gold standard for cheap and accessible index funds, Vanguard doesn’t disappoint with its Vanguard Real Estate ETF /zigman2/quotes/202931846/composite VNQ +0.35% offering. The fund boasts $35 billion in assets, all for the low expense ratio of 0.12%. That’s just $1.20 annually on each $1,000 invested.
You get wide exposure to the U.S. real estate sector through about 190 holdings, from telecom tower operator American Tower REIT /zigman2/quotes/200890312/composite AMT +2.46% to warehouse owner Prologis /zigman2/quotes/200785374/composite PLD -0.04% shopping mall giant Simon Property Group /zigman2/quotes/209746667/composite SPG -0.77% .
These big names all have entrenched, reliable operations. And since its component REITs have a mandate to deliver 90% of taxable income back to shareholders, the fund offers decent income potential with a yield of about 4% across its components.
The ETF has climbed 19.2% so far this year through Wednesday.
Invesco S&P 500 Equal Weight Real Estate ETF
Despite about 190 holdings, the Vanguard fund has about 40% of its total assets in its 10 largest positions. So for an investor interested in true diversification, a better balance may be a higher priority than simply having a whole lot of holdings.
That’s where the Invesco S&P 500 Equal Weight Real Estate ETF /zigman2/quotes/210295644/composite EWRE +0.0025% comes in. The fund simply takes the 32 largest real-estate stocks that represent the sector in the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.0020% and applies an “equal weight” methodology to these companies.
It’s not glamorous, but the approach ensures that investors are spread across the biggest REITs on Wall Street. This helps reduce the fund’s risk profile by offering true diversification across its holdings, and a reliance only on the largest names in the sector rather than the inclusion of smaller real-estate firms that can be prone to more volatility.