Investment Options: US Real Estate

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This is the latest post in a series covering investment selection. Each post covers an asset class, highlighting selection factors to consider and listing filtered investment options.

Based on the number of visitors who find my site by searching “Is real estate a good investment?“, real estate seems to be a popular investment topic, whether you think it’s a great investment or it’s still in a bubble. As mentioned in that post, I prefer to use REITs (real estate investment trusts) to invest in real estate instead of buying individual properties. I consider buying REITs to be more of a pure investment, while buying individual properties to be more like running a business.

As with other asset classes, I invest in index funds and ETFs that hold numerous REITs instead of buying them individually, keeping costs low and diversifying as much as possible. Like stocks, I would ideally categorize REITs into three regions: US, foreign developed markets, and foreign emerging markets. However, the REIT structure is not yet popular enough in emerging markets, so we are left with just the first two.

Let’s start with REIT funds focusing on US real estate, since that’s where the concept of REITs originated. Here are some of my requirements when selecting an investment in any asset class:

  • Does it represent the asset class I’m looking for? Since I am looking for real estate exposure, the fund I select should invest directly in real estate properties (REITs), not real estate-related companies like home builders. Further, the fund should be diversified enough to cover the asset class as broadly as possible.
  • The investment should be low-cost. Obviously looking at the expense ratio is a great start. Additionally, a high turnover ratio can indicate excessive trading that incurs unnecessary transaction costs and capital gains taxes.
  • The fund manager must be committed to the product long term. ETFs and index funds come and go all the time, so it’s best to stick with companies with a history of managing indexed investments. At the very least, make sure the investment you select is popular enough that it is an unlikely candidate for closure.

The following is a filtered list of ETFs and index funds that satisfies the specific criteria listed at the end of the post. Yet another factor to consider is that certain investments are commission-free depending on the broker you use. For example, if you have a Vanguard account, you can trade Vanguard index funds and ETFs without a commission.

Source: Morningstar, as of 9/12/2010
Name Ticker Fund Size ($ MM) Net Expense Ratio (%) Turnover Ratio (%) # of Holdings
Vanguard REIT Index ETF VNQ 13,643 0.13 16.00 100
SPDR Dow Jones REIT RWR 1,224 0.25 10.00 83
Vanguard REIT Index VGSIX 13,643 0.26 16.00 100
iShares Dow Jones US Real Estate IYR 2,717 0.47 17.00 77


  • Fund size of at least $250MM
  • At least 50 holdings
  • Net expense ratio of 0.50% or less
  • Turnover ratio of 50% or less
  • Minimum initial investment of $10,000 or less
  • Available to the public without an advisor

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