Buying property is arguably one of the most bulletproof strategies when it comes to growing wealth (in Australia, anyway). According to data from CoreLogic, the average Australian homeowner became $131,000 richer last year, as the average price of real estate surged over 22%. While this is brilliant news for everyone who already owns a home (despite the fact there are risks with home-ownership, too), it’s definitely left a lot of investors feeling priced out of real estate.
This is where “Real Estate ETFs” come in. Real Estate ETFs allow investors to purchase real estate like they’re buying a stock, giving them exposure to the booming real estate market without needing to take out a mortgage.
Now, with over 200 different ETFs to choose from on the ASX alone, is it really a good idea to invest in a real estate ETF? Or would your money simply be better off in a good old index fund?
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How Real Estate ETFs Work
A real estate ETF is an investment vehicle managed by a fund, where that fund buys a mixture of individual REITs (smaller funds that also own real estate) as well as large amounts of property themselves. As those properties grow in value and the funds receive rental income, the value of the overall ETF goes up.
The Benefits Of Real Estate ETFs
First of all, real estate ETFs are much less expensive than buying an entire house. They are much more “liquid” (easier to sell) than owning physical property, and have historically delivered some pretty strong returns.
Secondly, owning real estate in any form is a good way for investors to diversify their portfolio as well as gain access to less volatile growth, as real estate tends not to move in sync with the broader stock market. Generally, real estate tends to grow at a rate of around 7% per year, with less volatility than stocks, so there’s a reason the term “safe as houses” exists in financial parlance.
Recently, however, the average real estate ETF has posted incredible gains of approximately 27% over the last 12 months, with some products even outperforming stocks over time.
The Downsides To Real Estate ETFs
The only major downside to real estate ETFs is that they provide massive diversification across entire sectors. While diversification is generally a good thing, it does have some limitations. Unlike individual property investors, funds that manage real estate ETFs are not in the business of picking the right sector at the right time — they are in the business of buying up practically everything in a given property sector…
At the time of writing, the biggest real estate ETF in the world, Vanguard Real Estate (VNQ), holds roughly 25% of the $83 billion USD fund in the retail, office, and hotel sectors. Each of these sectors could suffer in the long-term as companies like Amazon, Zoom, and Airbnb continue to grow.
The Top Real Estate ETFs
- Vanguard Real Estate ETF (VNQ): The largest real estate ETF in the world — has returned 30.5% in the last 12 months.
- Schwab U.S. REIT ETF (SCHH): Gained 29% in the last 12 months.
- iShares Real Estate ETF (IYR): Gained 28.1% in the last 12 months.
Real estate ETFs are a fantastic way for all investors to gain healthy exposure to the property market without having to put down a deposit. Essentially, these investment products give investors all of the upsides of real estate investment without any of the downsides (not being able to sell, property damage etc.)
Obviously owning a real estate ETF doesn’t quite compare to owning a home, but for those who are just looking for solid investment opportunities, these may just deserve a spot in the portfolio.