By owning real estate investment trusts, or REITs, investors earn a portion of the profits without buying, managing or financing a physical property. Additionally, market participants have historically favored real estate for its diversification characteristics as these investments have low correlations to stocks or bonds.

REIT investors carefully consider dividend yields, as dividends are the primary motivation for investing in these assets. Dividend yields appear as a percentage, and are calculated by taking the annual dividend payment and dividing it by the share price.

In general, the type of assets a REIT ETF owns will determine the fund’s risk profile and the dividend payout.

Before investing in a REIT ETF, consider reviewing the fund’s prospectus to understand its investment strategy and the holdings it owns.

Top REIT ETFs

Below are some of the most popular REIT ETFs on the market. (Data as of Dec. 6, 2022)

Vanguard Real Estate ETF (VNQ)

VNQ is the most popular REIT ETF. The fund tracks an index of companies involved in the ownership and operation of real estate properties across the United States.

5-year returns (annualized): 4.3 percent

Dividend yield: 3.5 percent

Expense ratio: 0.12 percent

Assets under management: ~$35 billion

iShares U.S. Real Estate ETF (IYR)

IYR is one of the oldest REIT ETFs in existence. Similar to VNQ, the fund tracks an index of U.S. companies directly or indirectly involved in the real estate space.

5-year returns (annualized): 4.3 percent

Dividend yield: 2.6 percent

Expense ratio: 0.39 percent

Assets under management: ~$3.2 billion

Real Estate Select Sector SPDR Fund (XLRE)

XLRE represents one of the core sectors that make up the S&P 500 index: real estate. The fund invests in large-cap real-estate companies with operations in the United States.

5-year returns (annualized): 6.4 percent

Dividend yield: 3.2 percent

Expense ratio: 0.10 percent

Assets under management: ~$4.9 billion

iShares Global REIT ETF (REET)

REET tracks a global index of real-estate companies operating in emerging and developed markets, including the United States.

5-year returns (annualized): 1.8 percent

Dividend yield: 3.5 percent

Expense ratio: 0.14 percent

Assets under management: ~$2.9 billion

JPMorgan BetaBuilders MSCI U.S. REIT ETF (BBRE)

BBRE tracks an index of small-, mid- and large-cap companies, mainly in commercial and specialized real estate across the United States.

3-year returns (annualized): 0.58 percent (The fund launched in 2018)

Dividend yield: 3.6 percent

Expense ratio: 0.11 percent

Assets under management: ~$887.9 million

What are REITs?

REITs invest in a range of real estate properties such as residential apartments, office buildings, hospitals, data centers, hotels, retail stores and so on. The companies that support these activities, such as financial lenders and management companies, are also part of the group.

Some REITs specialize in specific market areas like mortgage financing, while others have diversified investments across the real estate market. The risk profile of the REIT depends on the assets it holds.

To qualify as a REIT, a company must follow certain requirements. One of these provisions is that the company must distribute to shareholders a minimum of 90 percent of its taxable income in dividends.

Most REITs fall into three categories: equity, mortgage and hybrid.

Benefits and disadvantages of investing in REIT ETFs

REIT ETFs provide a reliable stream of passive income for dividend investors without the hassle of owning or managing a property. In addition, these funds are highly liquid, so you can get back your principal at any time — something that’s not easily achieved through physical real estate. Also, REITs serve as a diversification tool in your portfolio, as they are less correlated to other asset classes like stocks.

On the flip side, REITs tend to be more volatile and are susceptible to quick losses, a characteristic that is less noticeable in physical real estate. In addition, since REITs must return 90 percent of income to investors, they have fewer funds available to act on other investment opportunities. Also, dividends from REITs are often taxed as regular income.

Despite these drawbacks, research by Nareit, a REIT organization, shows that REITs’ total return over the past 20 years through June 2021 has outperformed the performance of the Russell 1,000 large-cap index by 2 percent (10.7 percent versus 8.7 percent).

How to invest in REIT ETFs

A solid dividend strategy is an essential component of every investor’s portfolio. And when dividends are reinvested, the returns can be even higher.

When choosing REIT ETFs, here are four steps to consider:

1. Determine your financial goals

The type of investments you choose depends on what you are trying to achieve. For example, someone about to retire should have a more conservative approach to investing. So always let your financial objectives drive your decision-making.

2. Research REIT funds

When selecting REIT ETFs, pay attention to factors like dividend history, dividend yield, the fund’s performance, expense ratios, top holdings and assets under management. Investors can find this information in a fund’s prospectus.

3. Outline your asset mix

Before investing, do an inventory of what you own and how you want to allocate your assets. Remember, the key is to remain diversified.

4. Know what you own

By periodically reviewing your investments, you can take charge of your finances and make any adjustments needed. Leverage any free resources from your broker, like meeting with a financial planner, and always ask questions. Ultimately, there’s no such thing as a hands-off investment.

Like any other investment, REIT ETFs are susceptible to losses. However, the magnitude of potential losses is tied to the level of risk contained in the portfolio. So a fund that invests heavily in potentially riskier assets like highly-leveraged real estate companies will have a very different risk profile than a fund that invests in established, tried-and-true names.

— Bankrate’s Brian Baker contributed to an update of this story.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.