With the S&P 500 Index yielding just 1.9% and 10-year treasuries yielding barely more than 2%, income investors are still searching far and wide for alternative income-generating asset classes. In recent years, that search has included, in significant fashion, real estate investment trusts (REITs).
Historically, REITs are a beloved income-generating asset class because to gain the tax benefits of the REIT structure, these firms most payout at least 90% of their net income in the form of dividends.
Seasoned investors know that number to really pay attention when it comes to a REIT’s dividend sustainability and growth potential is funds from operations (FFO). FFO is used with REITs instead of traditional earnings per share. It adds depreciation and amortization on earnings while subtracting gains on sales.
With that bit of housekeeping out of the way, the world of exchange-traded funds (ETFs) make it easier for investors to access REITs while eschewing the need to try to pick the best individual real estate securities. In fact, there are more than two dozen dedicated REIT ETFs on the market today.
Many of the best REIT ETFs to buy feature dividend yields that are well above U.S. government debt or traditional equities. Additionally, some of the best choices also fit the bill as cheap REIT ETFs.
With that in mind, investors looking for added income should consider some of the following ETFs.
REIT ETFs to Buy: Vanguard REIT ETF (VNQ)
Expense Ratio: 0.12% per year, or $12 annually per $10,000 invested
The Vanguard REIT ETF (NYSEARCA:VNQ) is not just the largest REIT ETF. Home to $35.1 billion in assets under management, VNQ is also the largest sector ETF in the U.S. VNQ holds almost 160 stocks with retail and specialized REITs combining for 36.5% of the fund’s weight. However, this ETF is going to see some changes.
In July, Vanguard filed plans with the Securities and Exchange Commission (SEC) to alter VNQ’s investment objective and swap its index. Vanguard is looking to change VNQ’s underlying index to the MSCI US Investable Market Real Estate 25/50 Index, a move that would broaden the fund’s investable universe.
With an annual fee of 0.12%, VNQ is a cheap REIT ETF and less expensive than 90% of competing strategies, according to Vanguard data.
REIT ETFs to Buy: Fidelity MSCI Real Estate Index ETF (FREL)
Expense Ratio: 0.084%
Speaking of cheap REIT ETFs, there is the Fidelity MSCI Real Estate Index ETF (NYSEARCA:FREL). Some investors may not realize it, but Fidelity, not Vanguard, is home to the cheapest lineup of sector ETFs in the U.S.
FREL’s “underlying index is the MSCI USA IMI Real Estate Index, which represents the performance of the real estate sector in the U.S. equity market. Using a representative sampling indexing strategy to manage the fund,” according to Fidelity.
This REIT ETF holds 171 stocks and has a distribution yield of almost 3.5%.
REIT ETFs to Buy: VanEck Vectors Mortgage REIT Income ETF (MORT)
Expense Ratio: 0.41%
For the investor looking for some yield from his REIT ETF, there is the VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT). The 30-day SEC yield on this REIT is a whopping 9.38%.
Mortgage REITs typically yield more than their traditional equity counterparts, but the risk with those high yields is increased sensitivity to changes in interest rates.
Still, MORT is up 12.2% year-to-date even as the Federal Reserve has boosted interest rates twice. This ETF holds 26 stocks, but is dominated by Annaly Capital Management Inc. (NYSE:NLY), which yields 9.7% and accounts for almost 14% of MORT’s roster.
REIT ETFs to Buy: PowerShares KBW Premium Yield Equity REIT Portfolio (KBWY)
Expense Ratio: 0.35%
Speaking of high-yielding REIT ETFs, there is the PowerShares KBW Premium Yield Equity REIT Portfolio (NASDAQ:KBWY). While not as high-yielding as the aforementioned MORT, KBWY is no slouch in the yield department as highlighted by a 12-month distribution rate of 7.12%.
This ETF, which is almost seven years old, tracks the KBW Nasdaq Premium Yield Equity REIT Index. That index emphasizes mid- and small-cap high-yield REITs, making KBWY a nice complement to traditional large-cap strategies. The $356 million KBWY holds 29 stocks, but with a price-to-earnings ratio of over 49, it is richly valued relative to traditional small-cap strategies.
REIT ETFs to Buy: Global X SuperDividend REIT ETF (SRET)
Expense Ratio: 0.58%
A hidden gem from the lineup of Global X ETFs, the Global X SuperDividend REIT ETF (NASDAQ:SRET). This REIT ETF is another valid competitor when it comes to tempting yields with a 12-month dividend yield of almost 7.6%.
Unlike the other REIT ETFs mentioned to this point, SRET is not a dedicated U.S. ETF, though U.S. REITs account for over 63% of the fund’s weight. This REIT ETF also features exposure to Singapore, Canada, Australia and the Netherlands.
Mortgage, diversified and retail REITs combine for over 75% of SRET’s roster. Adding to this ETF’s allure is the fact that it pays a monthly dividend.
REIT ETFs to Buy: iShares Core U.S. REIT ETF (USRT)
Expense Ratio: 0.08%
Another entrant in the cheap REIT ETF competition is the iShares Core U.S. REIT ETF (NYSEARCA:USRT). USRT is one of several REIT ETFs in the iShares family and also the least expensive.
USRT, which is over a decade old, follows the FTSE NAREIT Equity REITS Index and holds 160 REITs.
This ETF has a trailing 12-month dividend yield of 3.89% and is up just over 4% year-to-date. As is the case with rivals such as VNQ and FREL, USRT allocates a significant percentage of its roster to specialized, retail and diversified REITs. Those REIT sub-groups combine for about 55% of USRT’s lineup.
Office and healthcare REITs combine for about a quarter of USRT’s weight. Furthermore, it has a three-year standard deviation of 14%.
REIT ETFs to Buy: iShares Mortgage Real Estate Capped ETF (REM)
Expense Ratio: 0.48%
The iShares Mortgage Real Estate Capped ETF (BATS:REM) competes with the aforementioned MORT in the realm of high-yielding mortgage REIT ETFs. And this iShares ETF offers plenty in the way of yield with a trailing 12-month dividend yield of almost 8.7%.
REM holds 33 stocks, which is a few more than the rival MORT, but the iShares fund also features a heavily concentrated lineup. Just two stocks — Annaly Capital and AGNC Investment REIT Corp. (NASDAQ:AGNC) — combine for almost 28% of this REIT ETF’s roster. REM has a three-year standard deviation of 11%.
REIT ETFs to Buy: WisdomTree Japan Hedged Real Estate Fund (DXJR)
Expense Ratio: 0.48%
For investors looking to focus on Japan’s rebounding real estate market, the WisdomTree Japan Hedged Real Estate Fund (NYSEARCA:DXJR) is the way to go.
As its name implies, this REIT ETF features a currency hedged mechanism, which means investors benefit when the dollar is strong against the yen. That is not the case this year as the greenback is trading lower against essentially all of the major currencies, in part explaining DXJR’s lethargic 2% year-to-date gain.
DXJR tracks the WisdomTree Japan Hedged Real Estate Index. This ETF has a low yield compared to the other funds highlighted here, but the goods news is that in recent years, Japan has been home to impressive improvement in terms of shareholder rewards, including dividends and buybacks.
Long-term investors could be treated to impressive dividend growth with DXJR, not to mention the potential for increased capital returns if Japan continues its efforts to weaken the yen.
Todd Shriber owns shares of VNQ.