2 High-Quality REIT ETFs Income Investors Should Consider

Investors interested in owning real property are spoiled for choice. There are countless individual stocks that afford investors exposure to all kinds of property types, from commercial to industrial to residential to retail, and everything in between. However, individual stocks require significant due diligence to ensure investors aren't taking on unnecessary risks. But there are options available today that allow investors to gain the exposure they want in real property, but in a diversified basket in a fund. This helps smooth out returns for investors -- with drawdowns less severe -- and instantly diversifies the investor away from single-stock risk. Investing in real estate is available through traditional real estate mutual funds, as well as the relatively newer exchange-traded funds category, or ETFs. Mutual funds and ETFs operate in much the same way, but have certain important differences that we think makes the case for investors eschewing mutual funds in favor of ETFs. Below, we'll look at some of these differences, as well as examples of high-quality real estate ETFs for investors to consider. ETFs vs. Mutual Funds: What Investors Need To Know ETFs and mutual funds operate in much the same way. Both offer investors instant diversification over holding single stocks, and both can help investors hone in on specific real estate strategies, such as owning malls, storage complexes, apartment buildings, or just about any other type of real property. In addition, both are much more liquid than attempting to buy real property on the open market, and much less risky than that strategy. However, there are some differences that tip the scales in favor of ETFs. For one, ETFs tend to offer lower fees than traditional mutual funds. Mutual funds generally have expense ratios that are above 0.5% annually, and in many cases, particularly for smaller funds, those expenses ratios are north of 1% annually. That may not sound like much, but over 20 years on a $100,000 account, that can eat away $20,000 without accounting for any investment gains, which would raise the balance, and therefore the fees the investor pays. ETFs, on the other hand, tend to have fees that are under 0.5%, and in many cases, closer to 0.25%, depending upon the provider of the ETF and the particularly strategy involved. Over time, the savings really adds up in favor of the investor, and this is a significant reason to favor ETFs over mutual funds. In addition, liquidity is rather poor with mutual funds, whereas ETFs trade from 9:30 AM to 4:00 PM ET every day the market is open, just like stocks. This means investors can buy or sell at essentially any time that they want to, and at a variety of prices. Price discovery is also much more robust with ETFs for this reason. Mutual funds, on the other hand, trade only once after the market close. A reference price is provided for that day based upon the changes in value of the fund's holdings, and that is the price at which investors can buy or sell. That reduces liquidity, and reduces the flexibility the investor has to get a better price, whether for buying or selling. ETFs, therefore, have the important advantages of lower fees and higher liquidity over mutual funds, and both offer the same benefits over buying real property or picking individual stocks. Examples of High Quality REIT ETFs Now that we've taken a look at why investors should target ETFs versus mutual funds, we'll take a look at two high-quality REIT ETFs as examples of what investors should look for. First up is SPDR Dow Jones REIT ETF . RWR is a diversified fund that seeks to correspond to the total return performance of the Dow Jones U.S. Select REIT Index. It does this with exposure to publicly traded REITs in the U.S. that meet certain criteria. The REIT must be an equity owner and operator of commercial and/or residential real estate, have a minimum market capitalization of $200 million, and derive at least 75% of total revenue from rental income from the properties it owns. This eliminates certain REITs such as mortgage REITs, which own no real property. The funds holdings include exposure of less than 10% to any individual stock, and the largest sector exposure is to Industrial REITs at 33%. The fund is fairly large at $1.9 billion in assets under management, and its fee is just 0.25% annually, which means fees for RWR are a small fraction of those from most real estate mutual funds. Our next high-quality REIT ETF is the Vanguard Real Estate ETF . VNQ seeks to match the return of the MSCI U.S. Investable Market Real Estate 25/50 Index, so holdings and returns will differ from that of RWR and other REIT ETFs for that reason. VNQ seeks to invest in stocks issued by publicly traded REITs, as well as companies that purchase office buildings, hotels, and other real property. Sector exposures are quite different for VNQ in that specialized REITs make up 37% of the total portfolio. Residential REITs, Industrial REITs, and Retail REITs all make up at least 10% of holdings as well, so VNQ is slightly more targeted than some other funds that seek to spread out exposure across sectors. VNQ's expense ratio is rock bottom at just 0.12% annually, which makes it quite attractive, particularly for investors interested in holding the fund for the long-term, as the low fee won't decay returns at a high rate. VNQ is also massive with nearly $40 billion in assets under management. Final Thoughts Investors that are interested in owning real property have many choices, but we think ETFs are by far the best way to gain exposure to real estate. Owning real property is volatile, risky, illiquid, and generally carries high costs. Mutual funds diversify investors with broader holdings, but fees tend to be fairly high and liquidity is limited to a reference price that is set once a day. REIT ETFs, on the other hand, offer diversification, exposure to potentially dozens of REITs at a time, and very low fees. When this is coupled with the very high liquidity of REIT ETFs that trade each day the market is open, it makes them the clear choice. RWR and VNQ are two examples of REIT ETFs with high-quality holdings, as well as very low fees. These important benefits are in addition to diversification and broad sector exposure, and we think investors looking for exposure to real property investments should put them on the short list.

2 High-Quality REIT ETFs Income Investors Should Consider

These ETFs offer exposure to potentially dozens of REITs at a time, and have very low fees.

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