The best real estate ETFs of 2023 were led by funds with high exposure to top-performing REITs like Annaly Capital Managment, Inc. (NLY) and Prologis, Inc. (LD). As mortgage rates fell back below 7.0% in the fourth quarter, these leading REIT stocks jumped as much as 35% from late October to mid-December, pushing the top real estate funds to double-digit gains after a rough year for the sector.
With rates projected to fall further in 2024, the real estate market may be set to continue their momentum.
See the top-performing real estate ETFs of 2023, the benefits and risks of investing in the sector and a market outlook for real estate ETFs in 2024.
Why Invest in Real Estate With ETFs?
Investing in a real estate investment trust, or REIT, can be a smart way to invest in real estate without having to buy physical property. Real estate ETFs provide investors a means of gaining exposure to a diverse range of REITs and other real estate-related businesses in one convenient package. The largest REIT ETF is the Vanguard Real Estate ETF (VNQ), with $31.6 billion in assets.
The potential benefits of investing in real estate ETFs include:
- Diversification
- Low fees
- Liquidity
- Lower risk
- Growth potential
- Income generation
Diversification
Investing in real estate with ETFs can help to diversify a portfolio and is more diversified than holding single REITs. These ETFs invest in various real estate sub-sectors, such as residential, commercial, industrial or health care. This diversification spreads the risk across different types of properties, reducing the impact of any single property's performance on the overall investment.
Low Fees
Real estate ETFs have lower fees than traditional real estate investments, such as buying a physical property or investing in a REIT. ETFs' lower fees make them more accessible to investors with smaller budgets or those who prefer to invest in real estate without the hassle of property management.
Liquidity
Investing in physical real estate properties can be illiquid, meaning that it can take a long time to sell the property and convert it into cash. In contrast, real estate ETFs are highly liquid, allowing investors to buy and sell shares quickly and easily.
Lower Risk
Investing in real estate ETFs can be less risky than investing in physical real estate properties. These ETFs invest in a diversified portfolio of real estate holdings, which spreads the risk across different properties and markets. Additionally, ETFs are regulated, providing investors with transparency and protection against fraudulent activities.
Growth Potential
Real estate ETFs provide investors with exposure to the real estate market's growth potential without the need to purchase physical properties. Real estate funds can also invest in global markets, providing investors with exposure to international real estate markets and potential growth opportunities.
Income Generation
REIT ETFs can provide investors with a steady stream of income through dividends. These ETFs invest in properties that generate rental income, which is then distributed to investors as dividends. This provides investors with passive income without the need for property management or other responsibilities associated with owning physical real estate properties.
Investors should keep in mind that, like other investment securities, REIT ETFs can expose investors to multiple risks, including principal risk and interest rate risk.
5 Best Real Estate ETFs by 2023 Performance
| Ticker | Fund | AUM | Expense Ratio | 2023 Return |
MORT | VanEck Mortgage REIT Income ETF | $242.8M | 0.43% | 15.28% |
INDS | Pacer Industrial Real Estate ETF | $221.4M | 0.55% | 14.82% |
REM | iShares Mortgage Real Estate ETF | $660.3M | 0.48% | 14.65% |
RWR | SPDR Dow Jones REIT ETF | $1.4B | 0.25% | 13.02% |
BBRE | JPMorgan BetaBuilders MSCI US REIT ETF | $870.1M | 0.11% | 12.84% |
Data as of December 15, 2023.
VanEck Mortgage REIT Income ETF
The VanEck Mortgage REIT Income ETF (MORT) tracks a market-cap-weighted index of mortgage REITs with a relatively concentrated portfolio of just 25 holdings. At 0.43%, MORT's expense ratio is below the category average and its AUM is $242.8 million.
Pacer Industrial Real Estate ETF
The Pacer Industrial Real Estate ETF (INDS) tracks an index of developed market companies that derive at least 85% of their revenue from industrial real estate activities. This includes industrial services such as warehouses and distribution centers, as well as self-storage facilities. INDS's expense ratio is 0.55% and its AUM is $221.4 million.
iShares Mortgage Real Estate ETF
The iShares Mortage Real Estate ETF (REM) tracks a market-cap-weighted index of residential and commercial mortgage REITs. REM's expense ratio is 0.48% and its AUM is $660.3 million.
SPDR Dow Jones REIT ETF
The SPDR Dow Jones REIT ETF (RWR) is one of the oldest real estate ETFs on the market. The fund tracks a market cap-weighted index of firms involved in the ownership and operation of commercial, residential, healthcare and other real estate. RWR's expense ratio is a low 0.25% and its AUM is high at $1.4 billion.
JPMorgan BetaBuilders MSCI US REIT ETF
The JPMorgan BetaBuilders MSCI US REIT ETF (BBRE) tracks a market-cap-weighted index of small-, mid-, and large-cap companies involved in the ownership or management of U.S. real estate. BBRE's expense ratio is low at 0.11% and its AUM is above average for the category at $870.1 million.
Outlook for Real Estate ETFs in 2024
While the outlook for real estate in 2024 is mixed, the greatest potential support for gains in the next year is cooling inflation and lower interest rate, which are advantageous REITs for several reasons. For example, REITs often rely on debt for property acquisitions and expansions. Lower interest rates make borrowing more affordable, enhancing the profitability.
Additionally, REIT ETFs may become more attractive to investors as lower fixed-income yields can make real estate funds better alternative income investments in a low-interest-rate environment. Higher yields can drive demand for real estate ETFs, positively impacting their prices.
Finally, lower interest rates tend to support higher asset valuations for real estate, as the present value of future cash flows increases when discount rates decline.
Investing in real estate with ETFs can provide investors with diversification, lower fees, liquidity, lower risk, growth potential and income generation. Therefore, real estate ETFs can be a smart choice for investors looking to gain exposure to the real estate market without the hassle and expenses of owning physical properties.
However, ETFs that invest in real estate have their risks, such as principal risk and interest rate risk. As with any investment, investors should understand these risks before investing in real estate ETFs.
