US Real Estate Investment Trusts (REITs)
REITs are attractive as diversifiers: they tend to have stock-like returns and risk, but are relatively uncorrelated with other asset classes. For more information about REITs, see here.
There are several similar-seeming investment options available. Which is best?
The funds are listed in rough order of our overall preference.
Preferences are listed separately for use in retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
- Vanguard Real Estate Index Fund Admiral Shares (VGSLX). E/R: 0.12%. This fund tracks the MSCI US Investable Market Real Estate 25/50 Index.
- Fidelity Real Estate Index Fund (FSRNX). E/R: 0.07%. This fund tracks the MSCI US IMI Real Estate 25/25 Index of equity REITs and other real estate securities.
- Schwab U.S. REIT ETF (SCHH). E/R: 0.07%. This ETF tracks the Dow Jones U.S. Select REIT Index of Equity REITs. Our preference for SCHH over VNQ is very small.
- iShares Core U.S. REIT ETF (USRT). E/R: 0.08%. This ETF tracks the FTSE Nareit Equity REITS Index. As an ETF, this fund is expected to be perfectly capital-gains tax efficient.
- Fidelity MSCI Real Estate Index ETF (FREL). E/R: 0.084%. This fund tracks the MSCI US IMI Real Estate 25/25 Index of equity REITs and other real estate securities.
- Vanguard Real Estate Index Fund ETF Shares (VNQ). E/R: 0.12%. This is the ETF share class of the Vanguard Real Estate Index Fund (VGSLX) above.
- DFA Real Estate Securities Portfolio (DFREX). E/R: 0.18%. This fund passively invests in equity and hybrid REITs. We'd prefer that the hybrid REITs be left out. But even if they were, this fund's expense ratio is a little high, in our opinion.
- DFA US Real Estate ETF (DFAR). E/R: 0.19%. This ETF passively invests in equity and hybrid REITs. We'd prefer that the hybrid REITs be left out.
- SPDR Dow Jones REIT ETF (RWR). E/R: 0.25%. This ETF tracks the Dow Jones REIT index of equity REITs.
- iShares Cohen & Steers Realty Majors Index Fund (ICF). E/R: 0.32%. This ETF tracks the Cohen & Steers Realty Majors Index of relatively "large and liquid REITs that may benefit from future consolidation and securitization of the U.S. real estate industry." This fund is quite a bit less diversified than other options in this asset class. With its relatively high expense ratio and unnecessarily concentrated portfolio, we see little reason to use it instead of the above alternatives.
- iShares Dow Jones U.S. Real Estate Index Fund (IYR). E/R: 0.40%. This ETF tracks the Dow Jones U.S. Real Estate Index of companies in the hotel and resort business and REITs that invest in apartments, offices, and retail buildings.
Taxable Accounts
Note that REITs should generally not be in taxable accounts, as they are relatively tax-inefficient.
- Vanguard Variable Annuity Real Estate Index Subaccount. E/R: 0.26%. This variable annuity subaccount tracks the MSCI US Investable Market Real Estate 25/50 Index—an index of equity REITs and other real-estate related investments. REITs are, by their very nature, quite tax-inefficient. You should generally avoid having them in taxable accounts in the first place. But if you must, it MAY be a good idea to do it inside a non-qualified Variable Annuity (which means it wouldn't really be in a taxable account after all). For the most part, this recommendation only applies if you already own a variable annuity—in general, we don't suggest going out and buying a variable annuity just to invest in this subaccount. A variable annuity is a VERY long-term investment with relatively little flexibility. For more info on variable annuities, see the papers and articles here.
- Vanguard Real Estate Index Fund Admiral Shares (VGSLX). E/R: 0.12%. This fund tracks the MSCI US Investable Market Real Estate 25/50 Index.
- Schwab U.S. REIT ETF (SCHH). E/R: 0.07%. This ETF tracks the Dow Jones U.S. Select REIT Index of Equity REITs.
- iShares Core U.S. REIT ETF (USRT). E/R: 0.08%. This ETF tracks the FTSE Nareit Equity REITS Index.
- Fidelity MSCI Real Estate Index ETF (FREL). E/R: 0.084%. This fund tracks the MSCI US IMI Real Estate 25/25 Index of equity REITs and other real estate securities.
- Vanguard Real Estate Index Fund ETF Shares (VNQ). E/R: 0.12%. This is the ETF share class of the Vanguard Real Estate Index Fund (VGSLX) above. However, unlike other non-Vanguard ETFs, this fund will be only as tax efficient as its underlying fund—no more and no less.
- DFA US Real Estate ETF (DFAR). E/R: 0.19%. This ETF passively invests in equity and hybrid REITs. We'd prefer that the hybrid REITs be left out.
- SPDR Dow Jones REIT ETF (RWR). E/R: 0.25%. This ETF tracks the Dow Jones REIT index of equity REITs.
- iShares Cohen & Steers Realty Majors Index Fund (ICF). E/R: 0.32%. This ETF tracks the Cohen & Steers Realty Majors Index of relatively "large and liquid REITs that may benefit from future consolidation and securitization of the U.S. real estate industry." This fund is quite a bit less diversified than other options in this asset class. With its relatively high expense ratio and unnecessarily concentrated portfolio, we see little reason to use it instead of the above alternatives.
- iShares Dow Jones U.S. Real Estate Index Fund (IYR). E/R: 0.40%. This ETF tracks the Dow Jones U.S. Real Estate Index of companies in the hotel and resort business and REITs that invest in apartments, offices, and retail buildings. With its relatively high expense ratio, we see little reason to use it instead of the above alternatives.
This web page contains the current opinions of Eric E. Haas at the time it is written—and such opinions are subject to change without notice. This web page is intended to serve two purposes:
- To educate the public; and
- To provide disclosure of Mr. Haas' opinions to prospective clients. We believe that prospective clients are well-served by being made aware of what they are buying—and what they are buying is advice that is based on these opinions.
We believe the information provided here to be useful and accurate at the time it is written. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here. Before investing, it is important to consult each prospective investment's prospectus and consider both its risk/return characteristics and its effect on your overall portfolio.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Altruist recommends consultation with a qualified tax adviser, CPA, financial planner, or investment adviser. If you would like to discuss the rationale or support for any particular idea expressed on this web page, feel free to contact us.