Housing has been one of the best performing asset classes in history. Yet, buying real estate is inaccessible to many. A real estate ETF provides a way to invest in property without actually having to own physical property yourself. But with many such ETFs available, navigating the choices is daunting. We selected the best real estate ETFs so you don't have to. Besides the advantages, we also explain the drawbacks of real estate ETFs in the light of building a balanced portfolio of ETFs suited for long-term growth.
Why real estate ETFs can be a good investment
Housing has been the best asset class in history
The mean real return on global housing from 1870 to 2015 was 7.05% compared to 6.89% for stocks, according to research done by the Federal Reserve Bank of San Francisco. It also had a substantially lower volatility.
ETFs are more accessible than physical property
As Belgians, we love real estate. It's often said that we're born with a "brick in the stomach". However, few are in a position to save for a deposit or be able to take out a significant loan to purchase a property. Fortunately, real estate ETFs offer the possibility for you to invest in property without actually having to buy the physical property yourself. They make real estate investing accessible to anyone, as you can buy such an ETF for a few tens of euros.
Real estate ETFs track an index made up of companies active in the real estate sector. These include real estate investment trusts (also known as REITs), property developers and construction companies too. They provide an easy way to diversify your investment portfolio beyond traditional stocks and bonds. Since real estate often has a low correlation with other asset classes, it can help reduce overall portfolio risk and volatility.
You can buy and sell a real estate ETF anytime
Another advantage of an ETF over physical real estate is that you can easily buy or sell shares in an instant. In finance jargon, ETFs are a lot more liquid than property. Whereas it usually takes months to sell a property, you can sell an ETF in a few seconds. On top of that, you can sell any number of shares you like. But with physical property, it's all or nothing. You can't choose to sell only 12% of your house for instance.
A substitute for rental income
Every year, the companies in a real estate ETF collect rent from their customers. After deducting costs, they pay you a substantial dividend. This is very similar to the rental return you would earn yourself, should you rent out privately. Often even higher. Especially if you take into account all the purchase costs, registration fees, renovations, taxes, monthly fees and hours you're stuck with if you rent out yourself. Not to mention the mental energy that managing private rentals requires from you. Through an ETF, you can relax while someone else is collecting your rent.
How to choose a real estate ETF
In order to choose the best real estate ETFs for you to invest in, there are some criteria we would stick with as a Belgian investor.
Follows an index
The style of investing based on index funds, also called passive investing, is a superior strategy for most people. There’s no need to spend time analysing individual companies and stocks, you can just follow an index of companies.
Accumulating or distributing
From a taxation point of view, accumulating ETFs are preferred over distributing funds to avoid paying a 30% tax on dividends. However, we understand that if you're reading this, you may want to receive dividends from your real estate ETF as a substitute for rental income. That's why we also included distributing ETFs in our selection.
Low cost
When we have the choice between several ETFs tracking the same index, we prefer a cheaper one (all other things being equal). The cost is measured by the total expense ratio (also known as the TER). Note that the TER is usually higher for real estate ETFs in comparison to globally diversified ETFs.
Domiciled in Ireland or Luxembourg
Both countries have special tax treaties with many countries around the world. This makes it fiscally advantageous to invest in ETFs domiciled in Ireland or Luxembourg. You can recognise these by their ISIN code that starts with "IE" (Ireland) or "LU" (Luxembourg).
Traded in €
We only selected funds that are trading in Euro as we don’t want to pay unnecessary currency exchange fees.
Diversified across many countries
Diversification is important when investing because it helps to reduce the overall risk. The basic idea behind diversification is to avoid having all your eggs in one basket, so that the impact of a single negative event is reduced. For example, if you only invest in one property in Belgium and Belgium experiences a downturn or crisis, your entire investment portfolio will be negatively impacted. However, if you had invested in a real estate ETF that diversifies across different countries, the impact of the downturn of that one country not performing well on the portfolio would be less severe.
Size matters
Larger funds are less likely to be shut down.
Replication
Physical replication is preferred over synthetic replication to reduce third-party risk.
The best real estate ETFs for Belgians
iShares Developed Markets Property Yield (IE00BFM6T921)
This ETF tracks the performance of the FTSE EPRA/NAREIT Developed Dividend+ index, reflecting the performance of listed real estate companies and REITs worldwide in developed markets that aim to offer high dividend yields. It offers exposure to 349 real estate companies and real estate investment trusts (REITs) across developed markets. Essentially, you're investing in a diverse range of real estate sectors, including commercial, retail, residential, and industrial properties.
The ETF is managed by iShares and costs 0.59% annually. The ETF was created in March 2018 and has had significant returns for investors based the historical data of the index:
Xtrackers FTSE EPRA/NAREIT Developed Europe Real Estate (LU0489337690)
This ETF replicates the performance of the FTSE EPRA/NAREIT Developed Europe index. It provides targeted exposure to 107 real estate equities and REITs across developed European markets. It focuses on a diverse range of real estate sectors, including commercial, residential, industrial, and retail properties.
The ETF is managed by Xtrackers (DWS) and has an annual cost of 0.33%. It delivered an average annual return of 3% since 2012 based on historical data of the underlying index.
SPDR Dow Jones Global Real Estate (IE00B8GF1M35)
The ETF replicates the performance of the Dow Jones Global Select Real Estate Securities index. This ETF provides broad exposure to real estate equities and REITs across both developed and emerging markets globally. It focuses on a wide array of real estate sectors, including commercial, residential, industrial, and retail properties. By investing in this ETF, you gain access to a diversified portfolio of global real estate companies and REITs. Geographically, it's the most diversified ETF in our selection. By buying the ETF, you'll be investing in 231 companies in one go.
The ETF is managed by SPDR and costs 0.40% annually. The ETF was set up in October 2019 and based on historical data of the index, it has provided an average return of 4.2% since 2006:
iShares US Property Yield (IE00B1FZSF77)
This ETF tracks the performance of the FTSE EPRA/NAREIT United States Dividend+ index, focusing specifically on the United States real estate sector. It's the first distributing ETF in this selection. By investing in this ETF, you're essentially investing in US REITs that cover a wide range of property sectors, including commercial, retail, residential, and industrial properties. This focus provides investors with a targeted investment in the US property market, offering potential for both income as you're paid dividends on a quarterly basis and capital appreciation. The dividends have a one-year forecast yield of 2% and you'll receive the dividends on a quarterly basis. As opposed to accumulating ETFs, you will have to pay a 30% tax on these dividends.
The ETF is managed by iShares and has an annual expense ratio of 0.40%.
Amundi Index FTSE EPRA NAREIT Global (LU1737652823)
The ETF tracks the performance of the FTSE EPRA/NAREIT Developed index. Despite the name of the ETF, it is not fully global as it provides exposure to the real estate sectors of just developed economies. Just like the previous ETF, it is also distributing, meaning you can use the ETF to generate income. You receive the dividends on an annual basis. However, it's also more diversified because it does not focus on the US.
The ETF is managed by Amundi and is one of the cheapest options we've listed as it costs 0.24% per year.
Which real estate ETF to go for?
It depends on you and your goals. If you want to earn income from your investments, you'll have to choose a distributing ETF. In that case, the Amundi Index FTSE EPRA NAREIT Global ETF that invests in real-estate companies across developed markets is a good option. But if you want to grow your wealth in a fiscally efficient way, the accumulating SPDR Dow Jones Global Real Estate ETF provides the most diverse exposure to the sector at a reasonable cost.
The downsides of real estate ETFs
Concentrated in one sector
While real estate ETFs offer diversification within the real estate market, they still concentrate in one sector. This exposes you to higher risks if the real estate market underperforms. For instance, the Dow Jones Global Select Real Estate Securities index suffered a 67% drawdown during the 2008 financial crisis, while a total market index like the MSCI ACWI IMI went down by "only" 49% (still a big drop!).
Total market equity ETFs already invest in real estate
Total market equity ETFs like IWDA already have an allocation to real estate. For instance, the MSCI World index allocates 2.3% to real estate companies. By adding real estate ETFs to an existing portfolio of ETFs, you overweight real estate. This is an active choice, and comes at the cost of a more complex portfolio and higher transaction fees.
Real estate is not really a distinct asset class
Research indicates that the returns of real estate can be explained by exposure to risk factors that we can already get from stocks and bonds. The most efficient way to get exposure to the factor returns of real estate is through a portfolio of stocks and bonds. REITs are not adding any expected return in excess of what could be achieved through stocks and bonds, but they are adding additional uncompensated risk.
Changes in interest rates strongly affect the price of real estate
Real estate investments are generally very sensitive to changes in interest rate. Rising interest rates can lead to higher borrowing costs for real estate companies, which reduces profit margins and affect their ability to pay dividends, leading to a decrease in the ETF's value. This is illustrated in the chart below, when in 2022 a sharp rise in interest rates caused a drop in the value of real estate stocks.
Tax on dividends (“roerende voorheffing” or “précompte mobilier”)
In Belgium, there’s a 30% tax on dividends. This tax is applicable to individual stocks but also to distributing ETFs. This is something you should seriously consider if you want to earn income from your investments, as you'll be losing a big portion to the tax man. On top of that, depending on your broker, there's also the extra layer of administrative work to declare your dividends.
Curvo, an easier way to invest globally
At Curvo, our investment philosophy is rooted in the power of diversification. Unlike the narrow focus of putting all your money into emerging markets ETFs, the portfolios available through Curvo are designed to harness the growth potential of a global outlook.
Globally diversified portfolios
While we recognize the stability and income potential of investing in real estate, the portfolios are diversified across various markets and sectors. This blend allows you to capture the potential growth of real estate as part of a broader investment strategy. Each portfolio invests in over 7,500 companies, across all sectors (including real estate), developed and emerging markets, and companies of all sizes. Furthermore, they invest only in index funds of stocks and bonds, an approach that we believe is superior to the active funds sold by your bank.
Invest in a portfolio tailored to you
Based on a questionnaire, the right mix of funds is selected that correspond to your goals and appetite for risk. The portfolios are managed by NNEK, a Dutch investment firm supervised by the Dutch regulator (AFM).
All your money is invested
In contrast with the majority of brokers, your investments work with fractional shares. This means that you are putting all your money to work. There will never be cash sitting on your account doing nothing.
Get a better return on your time
Don't waste energy figuring out the intricacies of good investing. Start your investment plan and spend your free time on the things that matter most to you.
Invest sustainably
Investing sustainably is challenging because everyone has different beliefs and values. We focus on one guiding principle: none of the portfolios invests in companies destructive to the planet.
Discover Curvo and how a diversified, passive investment approach can help you build a resilient portfolio designed for the long haul.
Summary
Real estate ETFs offer a practical way for Belgian investors to gain exposure to the property market without the complexities of direct ownership. But it's also important to be mindful of the risks and putting all your eggs in one basket. Diversifying your investment portfolio beyond just real estate ETFs can help mitigate these risks. A balanced investment strategy that includes a mix of asset classes, sectors, and geographic locations can provide a more stable foundation for long-term growth. Embracing a passive, index-based investment approach can further simplify the investment process, potentially leading to better long-term outcomes.
Questions you may have
What is a real estate ETF?
A real estate ETF is an investment fund traded on stock exchanges, much like individual stocks, that invests in real estate companies. It's convenient because it lets you enter the real estate market without buying or managing property. They avoid the complexities and high capital needs of direct property investment. By investing in a real estate ETF, you get dividend income, capital growth, and diversification, while also benefiting from the liquidity and flexibility of trading ETFs on a stock exchange.
Is investing in real estate still a good idea?
We think that investing in ETFs is the best way for most Belgians to build wealth for their future, better than real estate. Investing in real estate comes with some specific disadvantages compared to investing in ETFs. First, buying real estate often requires a substantial down payment, which entails a significant initial financial commitment. In addition, you face high costs, including registration fees and maintenance fees, which can reduce profitability. Another major drawback is liquidity; a property cannot be sold as easily and quickly as stocks or ETFs, meaning your assets may be tied up for a longer period of time. This also carries the risk of having 'all the eggs in one basket', especially if a large part of your wealth is invested in a single property. Moreover, returns on property investments can vary greatly depending on location, and there is no guarantee of success. Finally, managing a property and dealing with tenants can involve significant headaches and additional responsibilities, something many prefer to avoid. All these factors make real estate a less attractive option for some investors compared to the broader, more liquid and potentially less stressful alternative of ETFs.
What is the best real estate fund?
The choice hinges on your objectives. Should your aim be to generate revenue from your investments, opting for a distributing ETF is necessary. Under those circumstances, the Amundi Index FTSE EPRA NAREIT Global ETF, which focuses on real estate firms in developed countries, stands out as a viable choice. Conversely, if your goal is to increase your assets in a tax-efficient manner, the accumulating SPDR Dow Jones Global Real Estate ETF offers broad coverage of the industry at a fair price.
Is a REIT ETF worth it?
We think a total stock market ETF is a better investment than a REIT ETF. They already have an allocation to real estate, and overweighting real estate carries more risk that is not necessarily rewarded with a higher return.
Which real estate has the best returns?
Based on historical data, the iShares US Property Yield ETF (IE00B1FZSF77) has delivered the highest return in our selection over the last 10 years, with a average annual return of 6.3%.
What is the largest real estate ETF?
The iShares Developed Markets Property Yield ETF (IE00B1FZS350), which tracks the FTSE EPRA/NAREIT Developed Dividend+ index, is the largest real estate ETF available in Europe with over €1bn under management.