What are real estate trust funds ， how to buy related ETFs
As the domestic real estate market enters a downturn cycle, the difficulty of making money from real estate as an investment asset has soared exponentially in the country. Meanwhile, in overseas markets, Real Estate Investment Trusts (REITs) offer investors a unique investment tool that provides a broad entryway into the real estate market.
By pooling together various real estate investment portfolios, investors can purchase REITs just like buying stocks, share in the rental income and capital appreciation generated, and this method of investment has become a key component of asset diversification for many overseas investors.
Ⅰ. What are REITs?
Real Estate Investment Trusts (REITs) are trust funds established according to legal procedures that pool investors' capital through the issuance of stocks or fund units, managed by professional institutions in real estate operations, and distribute over 90% of the net after-tax income to investors. Essentially, REITs are an institutionalized arrangement for property investment.
REITs can be classified into three types based on the source of income:
1. Equity REITs： Equity REITs invest in and directly own property rights, with rental income from the owned properties being the primary source of revenue. This is the predominant type of REIT, accounting for over 90%.
2. Mortgage REITs： Mortgage REITs do not directly own property rights but invest in real estate loans or mortgage-backed securities (MBS), with income primarily derived from loan interest.
3. Hybrid REITs ：Hybrid REITs invest in both property rights and real estate loans.
Common REIT investments include commercial real estate and infrastructure, such as hotels, malls, office buildings, hospitals, which all fall under commercial real estate. Additionally, some domestic REITs invest in public rental housing and infrastructure projects like highways and bridges.
Ⅱ. What are the advantages of REITs, and what related companies are listed on the stock market?
Traditional real estate investment has disadvantages such as a large investment amount, lack of liquidity, difficulty in liquidation, and high transaction taxes and fees. REITs retain the benefits of traditional real estate investment while eliminating these disadvantages:
1. Mandatory high dividends: Currently, REITs are required by countries to distribute at least 90% of their net income to investors annually, ensuring a consistent cash flow for investors, typically paid out quarterly or semi-annually.
2. Low investment threshold: REIT index funds allow investors to participate in real estate rental dividends with small amounts.
3. Lower transaction costs: Buying REIT index funds is like buying stocks; no high taxes are needed, only subscription fees and operating costs.
4. Professional management: REIT management teams consist of professionals in the real estate field, who are more sensitive to industry trends.
The U.S. market has the most mature REIT development, and investors can pay attention to it. For instance, there are many REIT-related listed trust companies in the U.S. market:
1. $Simon Property(SPG.US$: One of the largest real estate trusts in the United States, engaged in the ownership and operation of shopping, dining, entertainment, and mixed-use properties.
2. $Public Storage(PSA.US$: One of the largest self-storage real estate investment trusts in the United States, engaged in the acquisition, development, and operation of self-storage facilities.
3. $Equity Residential(EQR.US$: A REIT focused on residential real estate, primarily involved in the acquisition, development, and management of leasing apartment properties.
4. $Welltower Inc(WELL.US$: A REIT focused on healthcare facilities, with properties including senior housing, medical offices, and multiple care areas.
5. $Prologis(PLD.US$： A REIT specializing in industrial properties and storage facilities, the company develops, acquires, and operates approximately 1.2 billion square feet of high-quality industrial and logistics facilities worldwide.
III. Why Choose ETFs for Investment?
In addition to the aforementioned options, there's another stable and secure investment product to consider — Exchange-Traded Funds (ETFs). Their advantages include:
1. Diversified Investment Risk: Fund managers first establish a portfolio that includes a variety of REITs, such as office buildings, shopping centers, and apartment buildings. This is akin to purchasing "ABC" and other types of REITs for investors, which can effectively spread the risk associated with investing in a single REIT and reduce losses due to specific regional or industry issues.
2. Higher Transparency and Standardization: Compared to REITs, ETFs' holdings, fee structures, and historical performance are public and transparent, making it easier for investors to analyze and compare. Additionally, ETFs follow standardized operating procedures, simplifying the investment decision-making process.
3. Convenient Diversified Trading for Investors: As an investor, you can simply buy the relevant ETF on the exchange and enjoy the investment returns from various categories of REITs. This method is clearly more time-saving and doesn’t require a high level of investment expertise.
4. Flexible Market Response: Investors can quickly adjust the proportion of different REITs in their investment strategy according to market conditions, making it easier to implement tactical or strategic investment decisions.
So, when choosing REIT-related ETFs, what indicators should we pay attention to?
Step One: Assess the Potential for Returns and Dividends
Investors often choose REIT-related ETFs for their stable dividend income (over 90% of after-tax income). Therefore, when selecting an ETF product, compare the dividend yields of various ETFs to see if they offer favorable dividend situations, to prioritize ETFs with higher dividend returns for increased income.
Step Two: Understand What Assets You Are Buying
REIT-related ETFs typically track specific REIT indexes, such as the FTSE Real Estate Index or the MSCI Global REIT Index. These indices usually cover outstanding REITs within each industry, but the constituents and their weightings may vary between indices. Investors should thoroughly understand the composition of the ETFs' tracked indices, the types of constituent REITs, and their proportions to avoid the situation where "one bad apple spoils the whole bunch."
Step Three: Optimize ETF Cost-Effectiveness
Institutional ETF products — baskets of stocks available for direct purchase — will inevitably incur management fees as compensation. An ETF's management fee rate and operating costs directly affect net returns, and lower rates can enhance investors' net income.
IV. What are some high-quality ETFs available for investors to choose from?
Below, we recommend several REIT-related ETFs on the U.S. stock market for investors to consider based on their preferences:
VNQ tracks the MSCI US Investable Market Real Estate Index, which includes U.S. investable market real estate stocks, covering all types of REITs except mortgage REITs, such as office buildings, shopping centers, hotels, and apartments. VNQ is one of the largest REIT-related ETFs in the market, offering broad exposure to the real estate industry, with low fees and good liquidity.
VNQ is known for providing stable dividend returns. As of April 28, 2024, VNQ offered a dividend yield of 4.31% and had an asset size of $31.475 billion. Its main constituents include Prologis, Public Storage, Simon Property Group, and other REIT-related trust companies. Additionally, VNQ has a management fee rate of about 0.08%, which is low compared to its peers.
SCHH tracks the Dow Jones U.S. Select REIT Index, which includes publicly traded REITs in the U.S. real estate market and represents the U.S. commercial real estate market, providing investors with returns related to direct real estate investments in the U.S. SCHH offers U.S. REIT investments at a lower fee, suitable for investors seeking cost-effectiveness.
As of April 28, 2024, SCHH offered a dividend yield of 3.49% and had an asset size of $6.019 billion. Its main constituents include Prologis, Welltower, and other REIT-related trust companies. SCHH's management fee rate is about 0.07%, offering a cost advantage within the industry.
XLRE tracks the Real Estate Select Sector Index, which includes companies engaged in the real estate business within the S&P 500 Index. This index is a real estate industry index separated from the S&P 500 Index, including companies engaged in real estate development and direct real estate operations, mainly REIT-related trust companies. XLRE is part of the Select Sector SPDR series and carries lower risk.
As of April 28, 2024, XLRE offered a dividend yield of 3.66% and had an asset size of $5.496 billion. Its main constituents include Prologis, Simon Property Group, and other REIT-related trust companies, and XLRE has a management fee rate of about 0.14%.
IYR tracks the Dow Jones U.S. Real Estate Index, which reflects the overall performance of the U.S. real estate industry, including residential, commercial, and industrial real estate listed companies, as well as various REIT-related trust companies. IYR provides broad investment in the U.S. real estate market, including residential, commercial, and industrial REITs.
As of April 28, 2024, IYR offered a dividend yield of 2.88% and had an asset size of $3.552 billion. Its main constituents include Prologis, American Tower, Simon Property Group, and other REIT-related trust companies. IYR's management fee rate is about 0.42%, which is relatively high.
RWR tracks the same index as SCHH, the Dow Jones U.S. Select REIT Index, which represents publicly traded REITs in the U.S. Unlike SCHH, RWR has a smaller asset size and lower liquidity; however, RWR has been on the market longer than SCHH, giving it higher market recognition. There are also differences in their holdings distribution, such as Equity Residential (EQR) being in RWR's top ten holdings but not in SCHH's.
As of April 28, 2024, RWR offered a dividend yield of 3.99% and had an asset size of $1.367 billion, with a management fee rate of 0.25%.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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101625629 : excellent article outlining the investible real estate landscape that's got recurring incomes other than capital appreciation
102429238 : If you take the US dividend, you still have to deduct 30%, and the dividend you get is less than the one in Malaysia. I personally think it is more economical to invest in Malaysia.
Eve Forever Gain 102429238: Simply based on dividend payout rates, basically local REITs definitely have better results. As long as you are willing to do your homework and slowly accumulate and manage, the results you can achieve will be superior to these professional ETFs. Let's work together.
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