Table of Contents
Both real estate investment trusts (REITs) and exchange-traded funds (ETFs) that invest in REITs offer some benefits of real estate investing, without having to own any properties directly. The main differences between a real estate ETF vs. a REIT lie in how they’re structured, dividend payouts, taxes, and the fees investors might pay to own them.
Also, REITs are considered alternative investments, which means they tend not to move in sync with traditional investments such as stocks and bonds.
Key Points
• REITs and REIT ETFs offer the benefits of real estate investing without direct property ownership.
• Differences between REITs and REIT ETFs include structure, dividend payouts, taxes, and fees.
• REITs are considered alternative investments and may not move in sync with traditional investments.
• REITs generate income through rents, while REIT ETFs own a collection of REIT investments.
• Investors can buy and sell shares of REIT ETFs on stock exchanges, while REITs can be publicly traded, nontraded, or private.
Overview of REITs
A real estate investment trust is a legal entity that owns and operates income-producing properties. REITs can hold a single property type or multiple property types, including:
• Hotels and resorts
• Self-storage facilities
• Warehouses
• Retail space, including shopping centers
• Apartment buildings or multi-family homes
• On-campus housing
• Assisted living facilities
REITs that own and manage properties typically generate most, if not all, of their income through rents. Some REITs may also invest in mortgages and mortgage-backed securities. REITs that invest in mortgages can collect interest on those loans.
There are two conditions to qualify for a REIT. A company must:
• Derive the bulk of its income and assets from real estate-related activities
• Pay out at least 90% of dividends to shareholders
Companies that meet these conditions can deduct the dividends paid to shareholders from corporate taxable income.
💡 Quick Tip: Alternative investments provide exposure to sectors outside traditional asset classes like stocks, bonds, and cash. Some of the most common types of alt investments include commodities, real estate, foreign currency, private credit, private equity, collectibles, and hedge funds.
Alternative investments,
now for the rest of us.
Explore trading funds that include commodities, private credit, real estate, venture capital, and more.
What Is an REIT ETF?
An exchange-traded fund or ETF is a pooled investment vehicle that shares some of the features of a mutual fund but trades on an exchange like a stock. A REIT ETF is an exchange-traded fund that owns a basket or collection of REIT investments.
While REITs own properties, REIT ETFs do not. REIT ETFs may have a fund manager who oversees the selection of securities held in the fund. The fund manager also decides when to sell off fund assets, if necessary.
A REIT ETF may be actively or passively managed. Actively managed ETFs often pursue investment strategies that are designed to beat the market. Passively managed ETFs, on the other hand, aim to mimic the performance of an underlying market benchmark or index.
Recommended: What Is a Dividend?
How REIT ETFs Work
REIT ETFs work by allowing investors to gain exposure to a variety of real estate assets in a single investment vehicle. For example, a REIT ETF may hold:
• Stocks issued by REITs
• Other real estate stocks
• Real estate derivatives, such as options, futures, or swaps
Investors can buy shares of a REIT ETF on a stock exchange and sell them the same way. Like other ETFs, REIT ETFs charge an expense ratio that reflects the annual cost of owning the fund. Expense ratios for a REIT ETF, as well as performance, can vary from one fund to the next.
REIT ETFs pay dividends to investors, which may be qualified or nonqualified. The fund may give investors the option to reinvest dividends vs. collecting them as passive income. Reinvesting dividends can allow you to purchase additional shares of a fund without having to put up any money out of pocket.
A REIT ETF might track the performance of an index, which may offer investors access to multiple REIT property sectors, such as:
• Residential
• Data centers
• Health care
• Hotels and resorts
• Office space
• Industrial
• Real estate services
• Retail
What’s the Difference Between REITs and REIT ETFs?
REITs and REIT ETFs both offer opportunities to invest in real estate, without requiring investors to be hands-on in managing property. There are, however, some key differences to know when considering whether to invest in a REIT vs. REIT ETF.
Structure
REITs are most often structured as corporations, though they can also be established as trusts or limited liability companies (LLCs). The Internal Revenue Service (IRS) requires REITs to have a board of directors or trustees who oversee the company’s management. As mentioned, REITs must pay out 90% of dividends to shareholders to deduct those payments from their corporate taxable income.
A REIT may be categorized in one of three ways, depending on what it invests in.
• Equity REITs own properties that generate rental income.
• Mortgage REITs focus on mortgages and mortgage-backed securities.
• Hybrid REITs hold both properties and mortgage investments.
REIT ETFs are structured similarly to mutual funds, in that they hold multiple securities and allow investors to pool funds together to invest in them. The fund manager decides which investments to include and how many securities to invest in overall.
Both REITs and REIT ETFs are structured to pay out dividends to shareholders. And both can generate those dividends through rental income, mortgage interest, or a combination of the two. The difference is that structurally, a REIT ETF is a step removed since it doesn’t own property directly.
Investment Style
REITs and REIT ETFs can take different approaches concerning their investment style. When comparing a REIT vs. REIT ETF, it’s helpful to consider the underlying investments, fund objectives, and management style.
An actively managed REIT, for example, may target a very different return profile than a passively managed REIT ETF. Active management may have the potential to offer higher returns if the REIT or REIT ETF can beat the market. However, it can also present more risk to investors.
Passive management, on the other hand, typically entails less risk to investors as the goal is to match the performance of an index or market benchmark rather than exceed it. Fees may be lower, as well, if there are fewer costs incurred to buy and sell securities within the fund.
How They’re Traded
Individual REITs can be publicly traded, public but nontraded, or private. Publicly traded REITs are bought and sold on stock market exchanges and are regulated by the Securities and Exchange Commission (SEC). Public nontraded REITs are also subject to SEC regulation, but they don’t trade on exchanges.
Private REITs, meanwhile, are not required to register with the SEC, nor are they traded on exchanges. These types of REITs are most often traded by institutional or accredited investors and may require higher buy-ins.
REIT ETFs trade on an exchange like a stock. You can buy shares of an REIT or REIT ETF through your brokerage account. If you decide you’re no longer interested in owning those shares you can sell them on an exchange. Unlike traditional mutual funds, share prices for REIT ETFs can fluctuate continuously throughout the day.
The Takeaway
Investors looking to diversify their portfolios real estate investments might explore REITs or real estate ETFs to see if either may be a fit for their portfolio goals and risk profile. Whether it makes sense to choose a real estate ETF vs. REIT, or vice versa, can depend on short- and long-term financial goals, as well as your preferred investment style. It’s important to keep in mind that, while alternative investment strategies may add diversification to a portfolio, they can also add risk.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
FAQ
Do REIT ETFs pay dividends?
REIT ETFs pay dividends to investors. When considering an REIT ETF for dividends, it’s important to assess whether they’re qualified or nonqualified, as that can have implications for the tax treatment of that income.
What are the risks of investing in REITs?
REITs are not risk-free investments, and their performance can be affected by a variety of factors, including interest rates, shifts in property values, and limited liquidity. In some cases, the dividend payout from a REIT may provide steady returns, but this is not always the case, as real estate conditions can fluctuate.
Do REITs have fees?
REITs can charge a variety of fees, which may include upfront commissions, sales loads, and annual management fees. REIT ETFs, meanwhile, charge expense ratios, and you may pay a commission to buy or sell them, depending on which brokerage you choose. Evaluating the fees for a REIT or REIT ETF can help you better understand how much of the potential returns you may get to keep in exchange for owning the investment.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/Maks_Lab
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Exchange Traded Funds (ETFs): Before investing in Exchange Traded Funds (ETF), always read the fund's prospectus. It contains important information about the fund’s objectives, risks, and fees. You can get a prospectus from the fund company’s website or by emailing our customer service at [email protected].
Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOIN-Q126-103