Real Estate Mutual Funds Comparison
A real estate investment trust (REIT) owns and manages real estate properties, including office buildings, apartments and shopping malls, and collects the rents from them. Shares of a real estate investment trust can be traded on the stock market. A REIT fund invests in the stocks of various REITs, which allows investors to buy into the real estate market without having to purchase and manage individual rental properties. To compare funds, look at management style, fees and performance.
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Fund Basics
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REITS don't have to pay corporate income taxes. In return, the law requires them to distribute 90 percent of all profits to shareholders in the form of dividends. This means that no matter what type of REIT fund you purchase, you earn regular dividends, typically on a quarterly basis. Since these dividends are reported as income, you must pay taxes on them each year you own shares in a REIT fund, unless you hold the fund in a tax-deferred account.
Active Management
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When fund managers buy and sell REIT shares throughout the year based on research and other factors, a fund is actively managed. The goal of active management is to beat a market index that focuses solely on REITs, such as the Dow Jones Equity All REIT Index.
Active management can lead to more profitable holdings in the long run, but it also comes with higher administrative fees, which are expressed on a mutual fund fact sheet as an expense ratio. Actively managed funds typically have expense ratios higher than 1 percent.
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Passive Management
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A passively managed fund focuses on a single REIT index and seeks to mimic its holdings and returns. So a passively managed REIT fund will buy approximately the same number of stocks in the index, in similar proportions, and hold them through the year. This approach of buying and holding reduces sales fees and typically produces returns very close to whatever the index returns each year. Expense ratios for passively managed funds can be as low as 0.26 percent.
Loads and Redemption Fees
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When you examine REIT fund fact sheets, look for data on loads and redemption fees. A load is a sales charge you pay when you purchase (front load) or sell (back load) shares. A no-load fund doesn't charge any fees when buying or selling shares.
Some REIT funds charge a redemption fee when shares are held for less than a year. This is done to discourage frequent selling, and redemption fees can range up to 1 percent of your total investment.
Performance
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REIT mutual funds traditionally perform better when the stock market is struggling, according to Financial Web. When REIT funds are in favor and more investors buy them, their share prices rise. Conversely, when the stock market is on an upward swing, investors tend to flood into the equity market and leave REIT funds, which causes their share prices to fall. Regardless of how the share price of a REIT fund performs, the fund continues to provide dividends as required by law.
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