What Is A Real Estate ETF?

Investing in residential and commercial property is more popular than ever, with many wanting to get in on the real estate market. The steep rise in real estate prices has made it difficult for many to buy property directly. Investing in real estate EFT is an alternative option if you want to invest in properties.   […]

Seamus Wolf
From Seamus Wolf

24. Oct 2022

Reading time: About. 6 minutes

What Is A Real Estate ETF?

Investing in residential and commercial property is more popular than ever, with many wanting to get in on the real estate market. The steep rise in real estate prices has made it difficult for many to buy property directly. Investing in real estate EFT is an alternative option if you want to invest in properties.  

What are real estate ETFs, and how do they work? What is there to consider when investing? These fundamental questions will be answered, but if you have further questions, don’t hesitate to contact us. 

Real estate ETFs allow investors to put their money in the real estate market without buying or owning a property themselves. Only stocks of companies in the real estate sector are found in a real estate ETF. Exchange -raded funds (ETFs) passively track the performance of a specific index without active fund management behind them. 

Real estate ETFs are often set up to follow the real estate sector. Sector ETF provides access to this particular industry’s largest publicly traded companies Therefore, global real estate EFTs allow you to invest worldwide in the largest real estate companies and investment trusts (REITs). The real estate sector includes companies engaged in developing and operating real estate and other real estate-related services and listed closed-end funds. 

Sector ETFs of this type should not be confused with thematic ETFs. Thematic ETFs track a non-standard industry group and a specific investment theme. 

Real estate ETFs, therefore, offer the opportunity to participate in the real estate market with small amounts of money. In addition, real estate ETFs contain shares of different companies that own, manage, or build  residential and commercial real estate, creating a broader spread of risk than with individual properties.


How Do Real Estate ETFs Differ From Real Estate Funds?

Besides ETFs, real estate funds also allow you to invest in property. While quite similar, there are important differences!

One of them is management. Real estate funds are actively managed by a fund manager, for real estate ETFs they only act passively by automatically tracking an index, without intervening. Resulting in the next difference. Since a fund manager actively tries achieve the highest possible return, investors incur costs, called management fees. If targets are achieved, performance fees may also be charged.

Real estate EFTs also require management to buy shares, provide investor information, and also cover staff and operating costs. However, these costs are lower as they aren’t paying for an active fund manager. 

Another difference is that real estate funds can invest directly in real estate instead of only in shares. In contrast, real estate ETFs only represent share equities. 

Open-ended and closed-end real estate funds

You must also understand the differences between open-ended and closed-end real estate funds. Open-ended real estate funds acquire, sell and manage rental properties, commercial complexes, and land. Investors  invest in numerous individual projects. Shares in open-end real estate funds can be redeemed if the 24-month holding period and 12-month notice period are observed. Dividends are paid out over the term.  On the other hand, closed-end real estate funds raise money for a single real estate project. Once the required capital is reached, the fund closes. A closed-end real estate fund does not redeem shares and does not pay dividends during the term, only after the project is completed.

Shares in real estate ETFs can be bought and sold again at any time as they only invest in shares of real estate companies. Giving a high degree of flexibility, with no holding period and no obligation to announce the sale.


A Lesser-Known Alternative: The REIT

In addition to stock indices, real estate ETFs can track REIT (Real Estate Investment Trusts) indices. Being a corporation that owns, manages real estate, or holds securities on real estate. Investors can choose to invest in equity REITs, which contain real tangible assets, or in mortgage REITs, holding stocks, and other securities on real estate. 

Investing directly in REITs has advantages, with at least 90% of profits being distributed to investors. Additionally, they are tax-exempt corporately. Another advantage is various regulations making REITs transparent investment options. Also, the business segment is limited to real estate, with the equity ratio being at least 45%. Meaning REITs can raise a maximum of 55% debt capital from investors. Providing a level of stability, this hybrid investment product combines a good ability to trade, liquidity of equity, and real estate characteristics.


Different Strategies!

Like all ETFs, real estate ETF funds and REITs can follow different investment strategies. Depending on their focus, their portfolio can differ widely. They are covered by various aspects of the real estate market and industry, with the national border considered. Here are some examples.

Dow Jones Real Estate ETF

All ETFs will follow a set index. But in this situation, they use the well-established Dow Jones as the basis for their selection. All shares in the ETF come not only from companies in the real estate business but also from the ones listed in this index. As a result, the ETF will contain bigger firms from the USA in the Dow Jones. While this is restrictive, it does guarantee a level of security for the investment.

German Real Estate ETF

A German real estate ETF will only invest based on geographical region or country and ignore other parts of the world. Helpful in investing in a specific region or preventing overlaps with other investments.

Residential Real Estate ETF

There are different kinds of real estate. The biggest difference is between commercial property and residential real estate.

A Residential real estate ETF ignores the commercial market and concentrates on the residential market only. Influencing the stocks acquired, with rental properties being included. What is the best real estate ETF?

There is no such thing as the best real estate ETF for every investor.  Real estate ETFs have too many positions, with the investors’ goals being vastly different.

Comparing real estate ETFs is difficult because many criteria make up an ETF’s quality. Including the expected profit, level of management costs, the risk, and whether the profit should be paid out or reinvested.


Picking The Right Real Estate ETF For You!

Not every real estate ETF is suitable for each investor. Here are some important factors for you to consider:

The costs: If the company issuing the ETF charges management costs (Total Expense Ratio, TER). The more you pay, the lower your profits. These costs can be as high as 2.0%. Look specifically for real estate ETFs with a low expense ratio.

The performance: What is the current value of the ETF? How has the ETF performed over the past few years? The answers to these questions will give you an indication of your potential gain. The longer a real estate ETF has been on the market, the better you can track its past performance and derive future profits.

The risk: As with many other investments, the rule of thumb applies to real estate ETFs: The higher the profit prospects, the higher the risk of accepting a loss. If you do not mind risk, a higher return is possible.

The use of earnings: ETFs differ in the use of earnings. There are two types. The profit is either paid out (distributing ETFs) or directly reinvested (accumulating ETF). For regular payouts,  a distributing real estate ETF is recommended.

The type of composition: there are differences in EFT composition (replication): in the direct or physical composition, the share of the individual index values is almost completely replicated one-to-one in the ETF. The company shares are not purchased directly in the indirect or synthetic composition. Only their development is reproduced. In addition, a swap transaction with a bank guarantees a fixed return for the ETF.

An important source of information for you as an investor is the fact sheets belonging to the respective ETF. These are information sheets compiled by the provider and made available in the ETF comparison and on the providers’ websites. 

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