Looking for the comparison of REITs vs REIT. ETFs? This article by Landmark Companies aims to shed light on the distinctions between REIT ETFs and REITs. Both of them are popular options in the realm of commercial real estate investing.
We will delve into the specifics of each, highlight their differences, and discuss the potential advantages and drawbacks of investing.
What is a Real Estate Investment Trust?
A company that engages in the purchase, sale, management, or financing of real estate is called a REIT. REITs may be privately traded, which means that only those investors who meet certain financial criteria can invest in them.
Alternatively, REITs may be publicly traded, and therefore their shares can be purchased. Any individual with a brokerage account can trade the shares on a major stock exchange. This article will primarily discuss publicly traded real estate securities.
What is a REIT ETF?
A REIT ETF can be better understood by breaking down the term into its two components. A REIT, as previously explained, is a type of investment vehicle that owns and operates income-generating real estate assets. An ETF stands for “exchange-traded fund” and is essentially a hybrid investment product that offers the diversification of a mutual fund with the convenience of being able to sell and buy shares on a stock exchange like a regular stock. ETFs can be bought and sold in real time at market prices, in contrast to mutual funds. They are purchased through the fund managers and whose share prices are only updated at the end of the day.
Differences Between ETF vs. REIT
Despite both being methods of generating income through commercial real estate, there are notable distinctions that investors should take into consideration. These differences include the following:
REITs vs Real Estate Investment Funds – Assets
REITs and REIT ETFs are both focused on commercial real estate, but they differ in their approach to investing. REITs directly purchase and manage properties, while an ETF (Exchange-Traded Fund) focusing on REITs (Real Estate Investment Trusts) holds shares of publicly traded real estate securities. For instance, the Vanguard Real Estate ETF, ticker symbol VNQ, is a large REIT ETF that aims to track a market-weighted index of US-based real estate companies. Some of its major holdings include prologis and American Tower.REITs engage in direct property ownership and management, while REIT ETFs invest in REITs through the purchase of shares.
ETF vs. REIT – Diversification
REITs invest in a range of properties within the same sector, while REIT ETFs invest in a variety of REITs across multiple property sectors, resulting in a more diversified portfolio. In other words, REIT ETFs offer a broader range of investment options compared to REITs.
ETF vs. REIT – Fees
Both REIT ETFs and REITs charge fees to investors of real estate. The fee structure of these investment vehicles can vary. So it is essential for investors to thoroughly understand it before purchasing.
Investors must weigh the advantages and disadvantages of both REITs and REIT ETFs before making a decision.
Are REIT ETFs a good investment? Pros and Cons of REITs vs REIT. ETFs
Despite their distinct characteristics, the advantages and disadvantages of investing in either REITs or REIT ETFs tend to be comparable.
Pros of Publicly-Traded REITs
REIT ETFs and REITs may provide investors with the following advantages:
In their ways, REIT ETFs and REITs provide a level of diversification to investors. This is beyond what can be achieved by buying a single property.
According to the IRS, REITs must distribute a designated portion of their earnings as dividends. As a result, REIT ETFs, which consist of investments in REITs, generally have high dividend production/yield. This provides investors with a consistent flow of income through dividends.
It is simple to buy and sell shares for both individual REITs and REIT ETFs.This gives a level of liquidity that is not typically found in the real estate industry.
Cons of Passive index ETF investing
As with any investment, it is important to consider the potential risks before investing in a REIT or REIT ETF. Some of the risks to consider include the following:
REIT ETFs and REITs, being publicly traded, can experience wild price fluctuations, particularly when the overall economy is experiencing difficulties. These fluctuations can occur regardless of the strength of the real estate.
Interest Rate Sensitivity
The sensitivity of REIT ETFs and REITs to changes in interest rates is quite high. This is because higher interest rates can lead to an increase in the price of capital. It can, in turn, result in slower growth.
While investing in commercial real estate properties through REITs or REIT ETFs can provide some tax benefits, they can also come with tax consequences. Dividends earned from these investments are considered taxable income, and capital gains taxes may be incurred in the event of a successful sale. The larger the profit, the higher the tax liability.
It’s natural for readers to wonder which option is the more favorable investment, considering the pros and cons.
REITs vs Real Estate Investment Funds – Which is the Better Investment?
It’s understandable to want to determine which of the two potential investments is superior. But the reality is that when it comes to REIT ETFs and REITs, neither one is inherently better.
However, one may align more closely with the risk tolerance level of investors, return expectations, investment time frame, and personal preferences. Investors should thoroughly research all aspects of an investment opportunity and choose the option that best fits their specific needs.
Do you still have any confusion? Contact professionals of Landmark Companies for more details and information.