Many investors have turned to exchange-traded funds (ETFs) to generate income with bond yields remaining near record lows. While it’s easy to assume that dividend ETFs include all types of dividend-paying stocks, most investors don’t realize that few of them include real estate investment trusts (REITs). Investors may want to consider adding dedicated REIT ETFs back into their portfolios to benefit from their attractive dividend yields and stability.
In this article, we’ll take a closer look at the differences between several popular dividend ETFs and how investors can add REITs into their portfolio with ETFs.
A Closer Look at Dividend ETFs
There are over 100 dividend ETFs that target everything from international opportunities to small-cap equities but most have little exposure to real estate investments. There are many different reasons for this lack of exposure, including the composition of the underlying index and the weighting methods used. But nevertheless, it’s important for investors to understand their exposure to real estate before purchasing dividend ETFs.
The three most popular dividend ETFs include:
- Vanguard Dividend Appreciation ETF (VIG )
- iShares Select Dividend ETF (DVY )
- SPDR S&P Dividend ETF (SDY )
The Vanguard Dividend Appreciation ETF (VIG ) and the iShares Select Dividend ETF (DVY ) – the two most popular dividend ETFs by assets under management – offer no exposure to the real estate sector. Meanwhile, the SPDR S&P Dividend ETF offers roughly 9% exposure to the real estate sector compared to just 3% exposure in the S&P 500 index. Other ETFs like the WisdomTree MidCap Dividend Fund (DON ) offer upwards of 15% exposure to REITs.
Adding REIT ETFs to a Portfolio
Many income investors seek out REITs because they pay out nearly all their profits to investors in the form of dividends each year. At the same time, many REITs are backed by tangible assets that might include shopping malls or housing developments. These assets provide a certain margin of safety for investors compared to companies that may rely on service sales or commodity prices to make dividend payments.
When looking at REIT ETFs, it’s important to consider the type of real estate holdings and the expense ratio associated with the funds. Most investors are best off with diversified REITs, spanning residential, office, lodging, to name a few, that have low expense ratios. International REITs also provide exposure to other developed countries like Japan and Australia, as well as parts of Europe, Asia and even emerging markets.
Some of the best U.S. and international REIT ETFs for investors to consider include:
| Ticker | Name | Issuer | Dividend Yield | Expense Ratio |
|---|---|---|---|---|
| (VNQ ) | Vanguard REIT ETF | Vanguard | 4.33% | 0.12% |
| (RWX ) | SPDR Dow Jones International Real Estate ETF | SPDR | 2.91% | 0.59% |
| (IYR ) | iShares U.S. Real Estate ETF | iShares | 4.41% | 0.43% |
| (VNQI ) | Vanguard Global ex-US Real Estate ETF | Vanguard | 3.37% | 0.24% |
| (SCHH ) | Schwab U.S. REIT ETF | Schwab | 2.61% | 0.07% |
ETFdb’s ETF Screener enables investors to quickly filter more than 2,000 different ETFs to identify those 40+ that have REITs among their holdings. In addition, investors can define other criteria to narrow down their search, such as setting minimum yields or maximum expense ratios. The tool may be helpful for investors that have a good idea of what they’re looking for in terms of yield, as well as those looking to avoid high cost funds.
The Bottom Line
Dividend ETFs have become a popular income investment option since bond yields have remained very low. While it’s easy to assume that dividend ETFs would include REITs, many of the most popular funds in the space avoid them. Investors can either choose dividend ETFs with exposure to REITs or invest in REIT ETFs separately to gain exposure to the space. The above list provides a great starting point of popular REIT ETFs, while ETFdb’s tools can help further narrow down the list based on criteria like dividend yields or expense ratios.
The inclusion of REITs as a CIGS categorization means that new REIT ETFs are being launched more often now. Visit the ETF Launch Center to stay updated with the newest and most innovative ETFs in the market, including newly launched REIT and real estate-focused ETFs.
