Making the Most out of Commercial Real Estate ETF Opportunities
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The investing world really does love its jargon, and that trend is unlikely to fade away anytime soon. For example, you might have heard of the term ETF in terms of investing and not know what it really means. So let’s clear up the confusion today.
ETF stands for exchange-traded fund, and it’s a security just like a stock. It can track an index, a whole sector, or even a single commodity. ETFs are designed to be fairly broad in order to balance risks. You’ve heard of ETFs before if you’ve watched any financial news on TV: S&P 500 ETF tracks the S&P 500 Index, an incredibly popular index of some of the largest publicly-traded companies in the United States.
Advantages of ETFs
There are some pretty important advantages to this investment, making it a great fit for investors. Here is a list of those advantages below:
- Liquidity. You have the ability to buy and sell ETFs with ease, as they trade just like a stock. You can even do your research by using ticker symbols for ETFs.
- Lower fees. If you’re hunting for the best investment vehicle for a different pool of money, you can look to ETFs.
- Tax efficiency. Fewer capital gains mean paying fewer capital gains tax. The passive management style of ETFs means that capital gains aren’t circulating at the same level.
As you can see, there are some strong benefits. Naturally, we want to also give you the drawbacks so you can make a truly informed decision. We’ll cover those disadvantages in the next section.
Disadvantages of ETFs
There is no perfect unicorn investment vehicle. Even though we’re fans of ETFs, we still want to present the disadvantages fairly. Hey, honesty is kind of our thing. Anyway, here’s that list of disadvantages:
- Less control. If you’re investing in an ETF that follows a specific index, you’re locked in. You can’t control what’s in that index.
- Lower dividends. When compared to stocks, the dividends you receive from an ETF tend to be lower. However, stocks have a higher risk profile.
- Tax complications. ETFs are a security like stocks, but they have different tax implications upon the sale of the ETF. Make sure that you have a good tax pro that understands the differences.
OK, so sometimes the pros and cons can feel depressing when you’re trying to take advantage of opportunities. However, think about it like this: wouldn’t you want to know as much as possible before plunging into an investment vehicle of any kind? That’s why we want to always present as much info as possible.
Example of Commercial Real Estate ETFs
As we mentioned, you can pin just about any asset to an ETF. So commercial real estate, being an income-generating asset, is a prime target for ETFs. Think about it like this: instead of putting your money into one commercial property, ETFs let your money spread out across a whole portfolio. The companies inside of a commercial real estate ETF focus on purchasing and renting properties.
iShares U.S Real Estate ETF
This ETF (ticker symbol: IYR) tracks a ton of companies in the real estate sector, which is perfect for investors looking to diversify. According to the iShares website, this ETF has a total return of 9.81% since its inception. They also have 88 different holdings inside this ETF, making it a very popular choice amongst investors. These holdings include Crown Castle International (CCI), Public Storage REIT (PSA), and Welltower Inc. (WELL).
Invesco S&P 500 Equal Weight Real Estate ETF
As the name implies, the focus here is on tracking the S&P 500 Equal Weight Real Estate Index. This ETF (ticker symbol: EWRE) tries to balance between REITs and diversified real estate companies. Top holdings include Duke Realty Corp (DRE), Regency Centers Corp (REG), and Vornado Realty Trust (VNO). This is at the time of this article; holdings can change as market conditions change.
SPR S&P Homebuilders ETF
This ETF (ticker symbol: XHB) goes back to 2006, so it isn’t as old as some. However, it tracks the homebuilding sector, which can be a great addition to your investment portfolio. Holdings in this ETF include companies you’re probably very familiar with, such as Lowe’s (LOW), D.R. Horton (DHI), Home Depot (HD), and Lennar Group (LEN).
Are ETFs like REITs?
So here’s the interesting part: REITs can go "inside" of ETFs, but they aren’t the same thing. REITs are a separate thing outside of ETFs and should remain that way. It can become quite complicated to break down the differences, but we did look at this guide to REITs vs. REIT ETFs for a much more detailed analysis.
Just keep in mind that an ETF is a security that "holds" assets and these assets can indeed include REITs.
Considerations to Get Started
As with other investment vehicles, it’s essential to go back to the numbers before you get too excited. Look at exactly how much you’re willing to put into commercial real estate ETF options. Get as much information about every fund as possible. Where do you buy it from? What fees can you expect to pay? The idea of a completely fee-free world is laughable; there is always a fee. Whether it’s disclosed to you or simply baked into the overall amount spent is a different discussion completely.
The more that your investment portfolio expands and diversifies, it’s important to make sure that you get the right tax professional advice on your side. So if you don’t have a good accountant and tax professional in your corner, it’s time to make that happen. After all, making money is great, but having someone keep you organized and honest is even better.
As always, this is not investment advice. ETFs grow and change over time, and it’s important to continue to do your own research. All investments have tax implications, and it is also up to you to know what triggers taxable events. Don’t go it alone; get professional help.
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