The residential and commercial real estate markets may have been trudging along a dreary path but something related to both markets has silently been going down a better road. Exchange-traded funds (ETFs) that comprise real estate investment trusts (REITs) are currently kicking butt.
According to ETF analyst for Morningstar Timothy Strauts, “REIT ETFs are leading the S&P by a healthy margin, outperforming the S&P over the last 12 months.”
An increase of 22% year-to-date was seen for U.S. ETF Real Estate through September 21. This is a great improvement versus S&P 500 stock index’s 3.71%. Even Vanguard REIT ETF (VNQ) had a new 52-week high of $54.85 last week.
What then is a REIT? And why is it attractive?
REIT invests directly in real estate, whether properties or mortgages, and acts as a security selling a stock on the major exchanges. Special tax considerations are also given to REITs and high yields are also typically offered to investors. REITs are also seen as a highly liquid method of investing in real estate.
A REIT may be invested in different areas of real estate like office buildings, apartments, shopping malls, hotels, and warehouses. It can be invested in just one of these areas or in one specific region, state, or country. As a means of participating in the real estate market, a REIT investment is said to be a liquid, dividend-paying means.
Wealth management firm Ty J. Young’s President Ty Young explains further its attractiveness, “Tax efficiency, liquidity, compound interest. If you don’t have $140,000 to buy that condo and start renting it out, you can find a REIT ETF starting probably at $50.”
Other attractions are its “short” option for investors and spending requirement of 95% of revenue as a dividend.
REITs, though, are not without risk.
Lucien, Stirling & Gray’s Ward warns, “The biggest risk with REITs is always going to be the stability of the underlying rents on the properties owned by the trusts. So long as those renters continue to pay their rents and someone is always in line to take on or renew the leases as they expire, then the REITs should remain stable. However, if the commercial side of the market begins to weaken, then that should over time begin to weaken the yields further, to the point that shareholders no longer find value and sell their shares.”