Real estate has always been a powerful tool for building wealth. But these days, you don’t need to buy a house or manage properties to benefit from it. Thanks to modern financial products, you can invest in real estate right from your phone or laptop. Two of the most popular ways to do that are through REITs (Real Estate Investment Trusts) and Real Estate ETFs (Exchange-Traded Funds).
Although they’re closely related, REITs and ETFs are not the same. If you’re trying to decide which is right for you — or whether it makes sense to own both — this article breaks it all down clearly and simply.
What Is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, manages, or finances income-producing real estate. These can include apartment buildings, office spaces, shopping malls, warehouses, hospitals, and more. The goal of a REIT is to generate income from real estate, primarily through rent or loan interest, and pass it on to investors.
By law, REITs must pay out at least 90% of their taxable income to shareholders in the form of dividends. This is why REITs are especially popular with income-focused investors who are looking for regular cash flow.
REITs come in different forms. Some invest in physical properties and earn rental income, while others focus on mortgage lending and earn interest income. A few do both. But regardless of type, buying a REIT means you’re investing in a real estate company that makes money from real estate operations or finance.
What Is a Real Estate ETF?
A Real Estate ETF is a type of fund that holds a collection of real estate-related assets, most commonly REITs. Instead of investing in a single REIT, an ETF allows you to invest in many of them at once. The ETF bundles these into one investment, which you can buy and sell just like a stock.
Many real estate ETFs are designed to track the performance of a specific index, like the FTSE Nareit All Equity REITs Index or the Dow Jones U.S. Real Estate Index. Some ETFs are purely made up of REITs, while others include additional companies related to the real estate sector, such as construction firms or property management businesses.
This structure gives investors an easy way to gain broad exposure to the real estate market, without having to choose individual REITs or follow the day-to-day news of specific companies.
What They Have in Common
REITs and real estate ETFs share several benefits. Both offer exposure to real estate without requiring you to own or manage physical property. Both are traded on major stock exchanges and are easy to buy and sell, making them more liquid than traditional real estate. They also both tend to offer regular income through dividends, which many investors appreciate.
In addition, both options allow you to start investing in real estate with relatively small amounts of money. You don’t need to save up for a down payment on a property — just a few dollars can get you started.
And finally, both REITs and ETFs can play an important role in a diversified investment portfolio, especially when you’re looking to add real estate as an alternative asset class alongside stocks and bonds.
How REITs and Real Estate ETFs Are Different
While REITs and ETFs offer similar benefits, there are important differences that can affect your investment decisions.
1. Diversification
A REIT is a single company, meaning your investment is focused on that company’s performance. If it does well, you benefit; if it struggles, so does your investment. On the other hand, a real estate ETF includes shares from many different REITs — often dozens. This gives you built-in diversification across property types, locations, and management teams. If one REIT in the ETF performs poorly, the impact on the total fund is limited.
2. Investment Approach
When you invest in a REIT, you’re buying into a specific business model. For example, some REITs specialize in shopping malls, others in apartment buildings, and others in data centers or hospitals. This allows investors to target particular segments of the real estate market. With an ETF, you’re taking a broader approach. You’re betting on the real estate sector as a whole rather than on a particular company or category.
3. Income and Yield
REITs are known for their high dividend payouts. Because they must return most of their income to shareholders, many REITs have above-average dividend yields compared to regular stocks. ETFs that hold REITs also pay dividends, but the yields are typically lower. That’s because ETFs combine both high-yield and lower-yield REITs, and they also deduct small management fees. If you’re focused on income, REITs often provide a stronger return, but at the cost of higher risk from being less diversified.
4. Risk and Volatility
Individual REITs can be more volatile than ETFs. If something negatively affects a single company — like a downturn in its specific real estate sector or poor management decisions — the stock price can drop sharply. ETFs spread out this risk by holding a variety of companies. This doesn’t eliminate risk, but it makes ETFs a more stable choice overall. For investors who prefer smoother performance and lower risk, real estate ETFs might be the better option.
5. Fees and Expenses
Most REITs don’t charge investors any direct fees beyond brokerage commissions when buying or selling. ETFs, on the other hand, come with ongoing management fees, known as expense ratios. These are typically low — often between 0.1% and 0.5% annually — but they do reduce your total returns over time. For long-term investors, these small fees can add up, so it’s worth factoring them into your decision.
6. Tax Considerations
Dividends from REITs are usually taxed as ordinary income, which may be higher than the tax rate for qualified dividends from other stocks. This applies whether you invest in an individual REIT or through a real estate ETF that holds REITs. However, ETFs may also hold other assets whose dividends qualify for lower tax rates, potentially offering slight advantages in taxable accounts. To avoid tax issues altogether, many investors hold both REITs and real estate ETFs in retirement accounts like IRAs, where dividends can grow tax-deferred or tax-free.
Which Is Better: REITs or Real Estate ETFs?
There’s no one-size-fits-all answer to this question. It depends on your personal goals, risk tolerance, and investment style.
REITs might be a better choice if you enjoy doing your research and want to target specific parts of the real estate market. They’re also appealing if you’re seeking higher dividends and are comfortable with more risk.
Real estate ETFs make more sense if you want a simpler, more diversified approach. They’re great for investors who prefer a set-it-and-forget-it strategy or want to avoid choosing between dozens of individual REITs. ETFs offer steadier performance and reduce the chances of making a bad pick.
Many investors use both. For example, they might build a foundation using a diversified real estate ETF and then add one or two specific REITs to increase income or take advantage of opportunities in certain market niches.
Real-Life Example
Let’s say you believe industrial real estate — like warehouses used for e-commerce — is going to perform well over the next decade. You could invest in a REIT like Prologis, which specializes in that type of property. If Prologis thrives, your investment could grow significantly and provide strong dividends.
But maybe you’re not sure which part of the real estate market will do best, or you want less risk. In that case, you might choose an ETF like the Vanguard Real Estate ETF (VNQ), which holds dozens of REITs across different sectors, including residential, commercial, industrial, and healthcare.
Each approach has its benefits, and using them together can offer a good balance.
Long-Term Performance
Over the last 20 years, both REITs and real estate ETFs have delivered solid returns, often outperforming bonds and sometimes even the broader stock market. Most of these returns come from dividends, which can be reinvested to generate even more growth through compounding.
REITs have historically returned between 9% and 12% annually, depending on the sector. ETFs generally offer slightly lower returns, typically 8% to 10%, due to diversification and small fees. But they also tend to carry less risk.
Remember, past performance doesn’t guarantee future results, but both REITs and ETFs have shown that real estate can be a powerful part of a long-term investment strategy.
Conclusion
Both REITs and real estate ETFs offer excellent ways to invest in real estate without the headaches of owning physical property. They give you access to commercial, residential, and industrial properties, along with the income potential that real estate offers.
If you’re seeking high income and are comfortable doing your research, REITs may be a better match. If you prefer diversification, stability, and simplicity, real estate ETFs might suit you better.
For many investors, the best strategy is to combine both — using ETFs for broad exposure and REITs to target specific opportunities. Either way, adding real estate to your portfolio can be a smart move for long-term growth and income.
