Real estate ETFs have become a popular investment option for investors who want to gain exposure to the real estate market without owning physical properties. However, with some experts predicting a real estate recession, advisors may be wondering if such funds remain a good option.
According to the data, there are currently 34 real estate ETFs with a total AUM of $53.5 billion. The average expense ratio for that group of funds is 0.43%, which is slightly lower than the average costs for other sector ETFs. The average 1-year return of real estate ETFs is -15.54%, which puts it among the worst-performing sectors for the period.
However, it is important to note that the real estate market is cyclical, and there are always ups and downs—some of which can be quite dramatic. Real estate ETFs can have various structures and focus areas, but the majority’s primary investment vehicles are Real Estate Investment Trusts (REITs). These companies specialize in owning or financing income-producing real estate properties, making them a popular choice for investors looking to gain exposure to the real estate market. Because of how they are structured, REITs can provide investors with a steady stream of income through dividends, which can help offset any potential market declines.
Top Real Estate ETF Issuers
Some of the top real estate ETF issuers by AUM are Vanguard, BlackRock Financial Management, Charles Schwab, and State Street.
Vanguard offers just one real estate ETF; the Vanguard Real Estate ETF (VNQ ) is the largest fund in the category and has an AUM of $30.65 billion. The fund has an expense ratio of 0.12% and a 1-year return of -15.86%. BlackRock has $7.92 billion across five real estate ETFs with an average expense ratio of 0.35% and an average 1-year return of -16.32%.
Schwab, like Vanguard, has just one real estate ETF with $5.51 billion in AUM. Its expense ratio is 0.07%, and it recorded a 1-year return of -15.65%. State Street offers two real estate ETFs with a combined AUM of $5.50 billion, an average expense ratio of 0.18%, and an average 1-year return of -14.34%.
Should You Invest in Real Estate ETFs?
Advisors looking for a hassle-free way to gain exposure to the real estate market may find ETFs covering the space to be a suitable option. By their very nature, ETFs offer liquidity, allowing for easy buying and selling throughout the day, unlike physical properties which can take months or even years to sell. However, advisors must also consider the potential risks associated with real estate ETFs. These investments are subject to a range of market risks and may be impacted by increases in interest rates, which can increase borrowing costs for REITs and reduce their profitability.
Although a real estate recession is a much-discussed possibility soon, real estate ETFs can still be a valuable addition to a diversified portfolio. Advisors must carefully consider their client’s investment objectives, risk tolerance, and financial situation before investing in these products.
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