Real Estate ETF vs. REIT

Some REITs focus on purchasing and managing shopping malls.

Real estate ETFs, or exchange-traded funds, and REITs, or real estate investment trusts, are similar in some ways but quite different in others. They're both a way to invest some of your funds in real estate without becoming a landlord or property owner. Each invests in property, but with the REIT, the investment team may be more hands-on than the ETF managers, because they frequently manage the real estate.

REITs

A real estate investment trust is a company that invests in either real estate or real estate financing. In many cases, the REIT also manages the assets it owns. The company is a pass-through entity for tax purposes. That means it distributes its profit to shareholders and they pay the tax due. The company must distribute at least 90 percent of the annual profits to shareholders in order to qualify. REITs may own and operate warehouses, hotels, shopping centers or other income-producing real estate. They may focus on specializing in a specific type of income-producing property, such as apartment buildings. They focus primarily on one area, such a large city or a region. In some cases, they might provide financing for real estate and own property.

Real Estate ETFs

Real estate ETFs hold REITs as investments. An ETF is an exchange-traded fund. Like a REIT, it trades on the stock exchange. ETFs track a particular index. In the case of real estate ETFs, it might be the Broad International REIT index, Broad US REIT index, Broad International Regional REIT Index, Narrow US REIT Index, Leveraged US REIT Index or Short US REIT Index. Normally, the management fees for a REIT ETF are low since there is seldom active management of the funds.

Similarities

Both REITs and real estate ETFs contain real estate. You purchase both types of investments on the stock exchange and the price of either may not have anything to do with the true value of the underlying investments but simply what market traders are willing to pay for shares. Both pass profits onto shareholders and act as pass-through investments. That means the profit and the taxation passes through to the shareholders.

Differences Between the Two

An ETF does not manage any real estate; instead, the ETF holds investments that contain real estate, which are REITs. When you purchase an ETF, even though it may track a specific index, such as a regional index, you still have more diversification than you do with a REIT. That's because it contains shares of several different REITs. Each of the different REITs focuses on different properties and has different management and varying investment results.

References

• IdexUniverse; First 'Active' Real Estate ETF Begins Trading; Eric Rosenbaum; November 2008
• Seeking Alpha; Real Estate [REIT] ETFs; June 2004
• REIT.com: What is a REIT?
• EFTdb; The Definitive Guide To Real Estate ETFs: Real Estate ETF Investing 101; Michael Johnston; November 2009
• AllStarStocks.com; The Real Deal on REITs (Real Estate Investment Trusts); Gene Walden
• GreenTrader.com; ETF Tax and Regulatory Issues; March 2003