Finding the best exchange-traded funds (ETFs) or other investments for income and growth potential can be quite challenging. It’s often a choice between them — growth or income — as finding both in the same stock or ETF can be difficult. However, such instruments do exist if one knows where to look.
In this article, we’ll take a look at a traditional income investor favorite — real estate investment trusts, or REITs — and walk through why we believe REIT ETFs are potentially a great way to take advantage of the income real estate investments can offer, as well as gain exposure to growth at the same time.
As you may may, ETFs function like mutual funds, but trade on stock exchanges throughout the trading day, instead of just at the end of the day as is typical of mutual funds. That gives ETF investors the liquidity of stocks along with the diversification of mutual funds in one vehicle, which is undoubtedly why they’ve become so popular in recent years.
After 2020 saw U.S.-domiciled ETFs bring in 476 billion in net flows (i.e., inflows less outflows), topping 2017’s record of $470 billion, they attracted nearly $248 billion in just the first quarter this year, according to fund sponsor BlackRock (NYSE:BLK).
Why Choose ETFs?
There are ETFs available for just about any investing strategy one can think of, and there is no shortage of real estate REITs to pick from. But why should income investors choose ETFs over just picking some REIT stocks to buy? In short, ETFs can have important advantages over owning single securities.
The two most obvious benefits of owning ETFs instead of individual stocks is that they offer instant diversification, as well as the added benefit of lowering the volatility of one’s portfolio. ETFs generally hold dozens of securities, which an individual investor is unlikely to do on their own due to the massive time investment of due diligence on such a huge number of individual stocks.
ETFs do the diversification for the investor, meaning the holder gains the benefits of reducing earnings or valuation risk of individual stocks, and instead gains exposure to an entire sector of stocks.
This has the additional benefit of lowering portfolio volatility because up and down moves are smoothed out over dozens of stocks rather than a few, meaning peaks and valleys are almost certain to be smaller as well. In short, ETFs afford investors the ability to gain exposure to a very broad group of stocks from a particular industry quickly and without the massive due diligence that would be prudent to perform on a basket of individual stocks.
Finding Gems in Crowded Field
The world of REIT ETFs is quite crowded, which is great because it gives investors a wide choice to fit their particular strategy. But it also means that choosing the best ones can be difficult. There are ETFs that offer exposure to mortgage REITs, as well as specialized REITs that focus on particular types of properties. In addition, there are REIT ETFs that own a broad selection of REITs in all kinds of property subsectors, offering the diversification and portfolio volatility advantages discussed above.
The Vanguard Real Estate Index Fund ETF Shares (NYSEARCA:VNQ) is by far the largest real estate ETF in the U.S. at $36 billion+ in assets. Its benchmark is the MSCI US Investable Market Real Estate 25/50 Index, and it seeks to replicate the return of the benchmark as closely as possible. The fund owns a wide selection of securities mortgage REITs, financial companies, and real estate companies. Thus, with 175 stocks in its portfolio, VNQ isn’t a pure-play real estate REIT. However, that means it is extremely well diversified given its exposure to real estate-related industries, as well as actual real estate. The current yield is a bit on the low side at 3.3%, but the expense ratio is just 0.12%, so the net yield is still 3.2% annually.
The second-largest real estate ETF in the U.S. is the Schwab U.S. REIT ETF (NYSEARCA:SCHH), an ETF that seeks to track the Dow Jones U.S. Select REIT Index. This ETF invests in the stocks of U.S.-based companies operating in every corner of real estate, including diversified REITs, industrial, office, residential, retail, and specialized REITs. The ETF seeks to diversify across growth and value strategies, as well as across market capitalizations.
The yield is somewhat lower than other REIT ETFs at 2.3%, but the expense ratio is rock-bottom at just 0.07% annually, so the net yield is about 2.2%. However, SCHH offers more targeted exposure to real estate than a more diversified fund such as VNQ.
In addition to broad ETFs like VNQ and SCHH, there are countless targeted ETFs that gain exposure to subsectors of the world of REITs. Examples include the Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEARCA:INDS), which offers investors exposure to industrial REITs. There is also the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (NYSEARCA:SRVR), which owns the stocks of REITs in data management. These and others offer the specific characteristics of those subsectors, meaning the diversification and volatility benefits are often reduced given more targeted exposure.
The Best ETF in the REIT Space
Given these factors, our favorite pick in the space is the Global X SuperDividend REIT ETF (NASDAQ:SRET). Tracking the Solactive Global SuperDividend REIT Index, this ETF is extremely well diversified across not only subsectors of the world of REITs, but geographically as well, holding 32 stocks from the U. S. and around the world. The expense ratio is elevated at 0.59%, but the current yield is 6.1%, so the net yield is still about 5.5%.
In addition to that, SRET pays shareholders on a monthly basis, meaning it can offer better balance for paying living expenses, and better compounding potential for those investors that can reinvest their distributions. SRET focuses less on growth than income, but given the other positive factors, we think it is a great pick among REIT ETFs.
REIT ETFs are a viable option for generating both income and growth. REIT ETFs are available with very targeted exposure to certain subsectors, and others have very broad diversification. We like the latter for their lower volatility and ease of use for the investor, and we see SRET as one of the best options available.
REITs aren’t necessarily considered high-growth investments, so growth is less of a priority for most REIT ETFs. SRET is no exception, but it offers other important benefits such as a huge yield and monthly payments. Given these factors, we see SRET as a highly attractive option for REIT ETF investors.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.