Best real estate ETFs to buy in Q2
Buying exchange traded funds can be a low cost way to access the real estate sector
The real estate sector can offer investors reliable long-term returns and has a place in a fully diversified investment portfolio.
Although worldwide property markets are currently experiencing a dip due to economic pressures and interest rate hikes, over the long term the commercial property sector can deliver strong returns. Commercial tenants tend to sign up for leases lasting for between five and 25 years, generating solid income.
According to data from the National Council of Real Estate Investment Fiduciaries (NCREIF), as of Q1 2021, over 25 years return for private commercial real estate properties held for investment purposes just outperformed the S&P 500 Index, with average annualised returns of 10.3% and 9.6%, respectively.
What’s more, via the stock market investors can access commercial property markets, such as retail, hotel, storage and office space, as well as international real estate markets, without owning the property outright themselves.
Many stock market quoted property companies around the world are now REITs – real estate investment trusts. These trusts benefit from certain tax breaks, meaning that they do not pay corporation tax and must pay 90% of their profits from property rental to investors. REITS must generate 75% of their profits from rental income and 75% of their property assets must be available for rental purposes.
The benefits of real estate ETFs
One good way to access the property sector is through buying specialist exchange-traded funds. ETFs are pooled investments which track certain indices and real estate ETFs hold a variety of property Real Estate Investment Trusts (REITS) or stocks, spreading the risk. This can be a more low cost and effective way of investing instead of buying individual REITs, especially for new investors, as well as a way to get access to a mixed basket of REITS.
Be aware that the investment returns from real estate can vary dramatically from year to year, depending on the performance of the companies’ property portfolios.
Find out more about investing in ETFs in general here.
Here are some of the best property ETFs available to retail investors.
iShares UK Property UCITS ETF
Run by Blackrock, the iShares UK Property UCITS ETF tracks the FTSE EPRA/NAREIT UK Index. Launched in 2007, it invests directly in listed UK REITS and real estate companies, focusing on growth, and is the biggest fund of its kind in the UK.
Domiciled in Ireland, the fund is currently worth £480 million and has 43 holdings. Among its top 10 investments are the Segro REIT, which accounts for 17.7% of the fund and owns and manages warehouses, major UK retail and office space owners Land Securities REIT and British Land REIT, Derwent London REIT, which owns substantial real estate in central London, the Tritax Bigbox REIT, which invests in logistics warehouses and self-storage REITs Big Yellow and Safestore Holdings.
The ETF has performed poorly in recent years, however, and is down by 30.9% over one year, 0.48% over three years, -0.16% over five years but up 31% over 10 years.
The expense ratio is 0.4% and the ETF is ISA and SIPP eligible, as well as UCITS compliant.
WisdomTree New Economy Real Estate UCITS ETF
Run by Irish Life Investment Managers, the WisdomTree New Economy Real Estate ETF has a slightly different focus to its investment approach than other funds, seeking to invest in property specifically in the technology, e-commerce and life science sectors.
It takes as its benchmark the CenterSquare New Economy Real Estate UCITS Index and it measures the performance of global real estate companies with exposure to technology, science and/or e-commerce related business activities. Around 61% of the fund is in American companies, with 6.2% in Australia, 5% in Singapore and 5% in the UK.
Its top 10 holdings include Digital Realty Trust, which provides the world’s biggest data platform, China Tower Corp, the world’s largest telecoms tower infrastructure provider, wireless infrastructure specialist SBA Communications Corp, data and records manager Iron Mountain, infrastructure provider Crown Castle Corp and Airbnb.
Meanwhile, 6% of the fund is invested in Australian firms, 5.78% in companies in Singapore, 5.4% in British firms and 5% in China. In total, 83.6% of the exchange-traded fund is invested in real estate, while 11% is in communication services and 4% in the consumer discretionary sector.
The fund is up 3.65% in the year-to-date but down 22.9% over one year. The expense ratio is 0.45%. Meanwhile, the fund is UCITS compliant, as well as eligible for ISA and SIPP investment.
Invesco S&P 500 Equal Weight Real Estate ETF
Invesco’s real estate ETF invests tracks the S&P 500 Equal Weight Real Estate index and pledges to invest at least 90% of its assets in the sector.
Worth $28 million, the fund has 31 holdings, with its top 10 including global commercial real estate services firm CBRE, Boston Properties, America’s biggest workplace property firm, Simon Properties, which invests in shopping malls and mixed-used properties, healthcare real estate firms Ventas and Healthpeak Properties, wireless infrastructure provider American Tower and Essex Property Trust, which owns residential apartment complexes on the West Coast of the US.
Like the iShares property ETF, the Invesco fund has also has its ups and downs since its inception. The ETF is down 25% over one year, up 2.92% over three years and up 5% over five years. It had bumper years in 2021 and 2019, however, up 49.46% and 25% respectively.
The total expense ratio is 0.4%.
REITS can be relatively illiquid investments. Only invest money you can afford to lose.
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