What is a Real Estate Investment Trust, or "REIT"?

Introduction

A Real Estate Investment Trust, or "REIT", is a company that owns or finances income-producing real estate. What makes them unique is that they are pass-through structures for tax purposes - they don't pay tax at a corporate level. To maintain their REIT status and avoid taxation at the corporate level, they must distribute at least 90% of their earnings every year to stockholders.

To become a REIT, a company makes an election with the Internal Revenue Service. To qualify as a REIT, a company must:

Our database currently contains 220 REITs that are traded on U.S. stock exchanges, with a total market capitalization of $1,216,695,694,993. See our list of REITs.

Because they are pass-through structures, REITs have higher dividend rates than most common stocks. As of today, the average dividend yield on the 220 REITs in our database is 4.85%. That makes REITs attractive to many investors, especially since REITs are real estate related.

There are two types of REITs: REITs that own real estate, or "REITs", and REITs that buy mortgages, or "mortgage REITs". We classify the REITs in our database into one of these two categories because there is a substantial difference between a REIT and a mortgage REIT. A mortgage REIT typically attempts to make money by borrowing money at short-term interest rates and investing it in mortgages, thus making money on the normal spread between short-term and long-term interest rates. See our article what is a mortgage REIT?

Here is a breakout of the REITs in our database by type:

Security TypeCountMarket Cap%Average Dividend Yield
Mortgage REITs41$49,411,159,0064.1%15.6%
REITs179$1,167,284,535,98795.9%4.4%
Total220$1,216,695,694,993100%4.8%

For the rest of this article, we are going to focus on REITs only, as we cover mortgage REITs in our separate article what is a mortgage REIT?

Indexes

REITs are included in most popular stock market indexes like the S&P 500 Index. The S&P 500 Index is probably the most widely followed index of large cap U.S. stocks. Here is the approximate weight of REITs in the S&P 500 Index:

Security TypeCountMarket Cap%
Common stocks474$26,153,585,606,34897.1%
REITs30$774,290,301,8692.9%
Rights1$00.0%
Total505$26,927,875,908,217100%

Here is the approximate weight of REITs in the Russell 1000 Index, an index that includes the largest 1,000 U.S. common stocks, REITs and mortgage REITs based on total market capitalization:

Security TypeCountMarket Cap%
Common stocks908$29,616,834,740,72596.5%
MLPs1$2,473,014,2400.0%
Mortgage REITs7$27,782,700,5900.1%
REITs78$1,038,990,574,4453.4%
Rights1$00.0%
Total995$30,686,081,030,000100%

How about small cap stocks? Here is the approximate weight of REITs in the S&P Smallcap 600 Index, one of the most widely followed indexes of small cap U.S. stocks:

Security TypeCountMarket Cap%
Common stocks549$639,178,591,24991.5%
Mortgage REITs11$9,407,516,0551.3%
REITs41$50,248,261,8807.2%
Total601$698,834,369,184100%

Size Categories

Although there are some large REITs, REITs on average tend to skew a little smaller than U.S. common stocks. Here's a breakout:

Category# of REITsMarket cap%Avg Dividend Yield
Large cap29$810,159,014,41869.4%3.5%
Micro cap27$3,051,013,0840.3%18.5%
Mid cap59$282,176,317,53424.2%5.9%
Small cap64$71,898,190,9516.2%8.0%
Total179$1,167,284,535,987100% 4.39%

As explained in our article size categories, there is no standard definition of what makes up a "large cap" stock. On our website, we use: Large cap > $10 billion, Mid cap between $2 billion and $10 billion, small cap between $300 million and $2 billion and micro cap <$300 million.

Note also that as REITs get smaller, the dividend yield on average tends to get higher.

How do they perform?

REITs have performed well as an asset class, even at times outperforming other common stocks. As an example, let's look at the market price performance of RWR, the SPDR Dow Jones REIT ETF, which tracks the Dow Jones U.S. Select REIT Index, compared to SPY, an ETF that tracks the S&P 500 Index composed of common stocks:


And remember that REITs also have higher dividend rates than most common stocks. To truly analyze the total return performance of a security you must look at the market price of the security and you must include any dividends that that security has paid. One way we do that on our website is using total return symbols. Our total return symbols attempt to display in a chart the return of an investor, assuming the investor automatically reinvested any dividends in that security. Let's look at the total return of RWR and SPY using our total return symbols:


ETFs that buy REITs

There are now 22 ETFs and ETNs that either buy REITs or track an index of REITs:

SymbolDescriptionInception DateLeverage FactorCurrent YieldActions
IYRiShares U.S. Real Estate ETF06/12/20001.003.34%Analyze
ICFiShares Cohen & Steers Realty Major ETF01/29/20011.002.66%Analyze
RWRSPDR Dow Jones REIT ETF04/23/20011.004.15%Analyze
VNQVanguard REIT ETF09/23/20041.003.88%Analyze
REZiShares Residential Real Estate Capped ETF05/01/20071.003.44%Analyze
USRTiShares Core U.S. REIT ETF05/01/20071.003.96%Analyze
FRIFirst Trust S&P REIT Index Fund ETF05/08/20071.003.40%Analyze
FFRFirst Trust FTSE EPRA/NAREIT Developed Markets Real Estate ETF08/27/20071.005.85%Analyze
RDOGALPS REIT Dividend Dogs ETF05/07/20081.005.16%Analyze
PSRInvesco Active U.S. Real Estate Fund ETF11/20/20081.003.48%Analyze
DRNDirexion Real Estate Bull (3x) ETF07/16/20093.006.84%Analyze
DRVDirexion Real Estate Bear (3x) ETF07/16/2009-3.002.12%Analyze
KBWYInvesco KBW Premium Yield Equity REIT Portfolio ETF12/02/20101.0011.27%Analyze
SCHHSchwab U.S. REIT ETF01/13/20111.003.38%Analyze
ROOFIQ US Real Estate Small Cap ETF06/14/20111.006.63%Analyze
REETiShares Global REIT ETF07/08/20141.006.34%Analyze
SRETGlobal X SuperDividend REIT ETF03/16/20151.0012.81%Analyze
ROREHartford Multifactor REIT ETF10/03/20161.002.20%Analyze
NURENuShares Short-Term REIT ETF12/20/20161.003.70%Analyze
INDSPacer Benchmark Industrial Real Estate SCTR ETF05/14/20181.001.93%Analyze
BBREJPMorgan BetaBuilders MSCI US REIT ETF06/15/20181.002.91%Analyze
NETLNETLease Corporate Real Estate ETF03/22/20191.004.57%Analyze

Investors have to decide whether to include in their portfolio an ETF that is focused on REITs, as most investors probably already have exposure to REITs via their ownership of an ETF that tracks the S&P 500 Index. But because of their high dividend rate and focus on real estate, many investors will over-weight their holdings in REITs by purchasing one of these ETFs that is focused on REITs.


All data is a live query from our database. The wording was last updated: 01/18/2019.

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