REITs vs. ETFs: Which Are Better for Retirees? (2024)

Real estate investment trusts (REITs) and exchange-traded funds (ETFs) both offer the potential to earn passive income during retirement. There are even REIT ETFs for investors who want the best of both worlds. Let’s consider why you might want to choose or avoid each of these types of investments if you’re retired.

The Case for REITs

“A real estate investment trust, or REIT, is a type of investment fund that owns income-producing real estate and is required to pay out most of its taxable income as dividends,” explains Robert R. Johnson, former president and CEO of the American College of Financial Services, a nonprofit, accredited, degree-granting institution based in King of Prussia, PA. “REITs are considered income investments because of their high dividend yields,” he says, and there are many varieties available, including retail, residential, healthcare, office and mortgage. “An investor should consider REITs if he or she wants exposure to the real estate asset class,” Johnson says.

REITs can also make sense if you’re looking for an investment that provides income while you’re holding it and not just if you manage to buy it and sell it at the right times. REITs are able to pay dividends based on rent and property appreciation. A drawback is that much of this REIT income is taxed as ordinary income, which carries a higher tax rate than dividends from stocks, ETFs and many other asset classes.

“Retirees should look for REITS that invest in commercial buildings that have mainly AAA tenants or big companies, or residential buildings that have low vacancy rates,” says Mike Ser, cofounder of Ser Man Traders, a company that trains people to become professional traders. These types of buildings generate much more stable cash flow, he says.

But REITs may not offer enough diversification for your portfolio. “By investing in a REIT, you are focusing your investment in one very narrow sector of the market,” says Charles J. Stevens, former financial advisor. “When this sector is out of favor with investors, your REIT price will not reflect true value should you need to sell it.”

That being said, if you want more exposure to real estate, a REIT offers greater diversification and liquidity than, say, buying a rental property. With a REIT you’ll own a small share of many properties, and as long as you invest in traded REITs (as opposed to nontraded REITs), you’ll usually be able to quickly sell your holdings on an exchange if you want to exit your position for whatever reason.

The Case for ETFs

“An exchange-traded fund, or ETF, is a type of investment fund that trades like stocks on an exchange,” Johnson explains. “ETFs can hold a variety of assets such as stocks, bonds, commodities and real estate.” If ETFs sound like mutual funds, you’re on the right track, but there’s a key difference. “ETFs differ from mutual funds in that they trade continuously throughout the trading day, while mutual funds are bought and sold at net asset value at the end of the trading day,” Johnson says.

Stevens favors passively managed ETFs over REITs. He says that ETFs allow investors to tailor a portfolio to almost any risk parameter or tolerance. “The sheer size of the ETF market in most cases can create liquidity for the investor that REITs cannot match,” Stevens says. “ETFs have a cost advantage at the management level that REITs cannot match.”

Ser says that retirees should look for ETFs made up of solid, stable companies that consistently pay dividends at least quarterly.

ETFs, like REITs, can leave your portfolio insufficiently diversified. If you put half of your money in an information technology ETF, you’re not getting the diversification you would get with an S&P 500 ETF, which would be allocated 20% to IT stocks in today’s market. But in general ETFs offer a greater opportunity for diversification because, with a single ETF, you can track multiple stock indices.

REIT ETFs

Want the best of both worlds? You’ve got it. “ETFs and REITs are not mutually exclusive, as there are many REIT ETFs,” Johnson says. “That is, there are exchange-traded funds that invest exclusively in REITs. For instance, the S&P REIT index fund FRI is a passive ETF that seeks to replicate the return on the S&P United States REIT index.”

The Bottom Line

Either or both of these investment types can be right for retirees as long as they fit into an overall portfolio strategy. Retirees should understand the expenses and risks associated with any specific REIT or ETF they’re considering, as well as what level of income to expect and how it will be taxed. “Retirees should be looking for solid investments that generate a stable yield or income for them during their retirement years,” Ser says. “Both REITS and certain ETFs can accomplish that.”

REITs vs. ETFs: Which Are Better for Retirees? (2024)

FAQs

REITs vs. ETFs: Which Are Better for Retirees? ›

ETFs have a cost advantage at the management level that REITs cannot match.” Ser says that retirees should look for ETFs made up of solid, stable companies that consistently pay dividends at least quarterly. ETFs, like REITs, can leave your portfolio insufficiently diversified.

Are REITs good for retirement accounts? ›

Investing in REITs through your IRA provides many advantages, such as: Diversification: REIT investments through IRAs allow you to get exposure to the real estate market without investing directly in property. This strategy can help investors reduce their overall risk.

Should retirees invest in ETFs? ›

By spreading risk across a large number of holdings, ETFs can help protect your retirement savings from significant losses. Additionally, ETFs provide the flexibility to adjust your retirement portfolio as market conditions change. This is particularly important during periods of market volatility.

Which is better, ETFs or REITs? ›

For example, if consistent income is a priority, especially in retirement, REITs may be more attractive because of their dividend payouts. But if you're looking for broad market exposure and long-term growth, ETFs might be better suited to your needs.

What is the downside of REITs? ›

Investors should be aware that non-traded REITs may have high up-front fees or sales commissions. These REITS may also have annual management fees, and the management team may take a percentage of profits in the form of “promoted interest”. Together these fees can put a dent in the ultimate return that investors see.

What percentage of retirement portfolio should be in REITs? ›

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

What is the 90% rule for REITs? ›

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

What is the best ETF for seniors? ›

Balanced and well-rounded: Vanguard High Dividend Yield ETF

By focusing on high-yield dividend ETFs like the appropriately named Vanguard High Dividend Yield ETF (VYM -1.55%), retirees can enjoy the balanced benefits of income generation and potential capital appreciation.

What is a good portfolio for a 70 year old? ›

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

What is better than REITs? ›

REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.

What is the best account to hold a REIT in? ›

These trusts primarily pay through dividends and generally don't appreciate in value significantly. 1 Because of their high dividend yield, holding a REIT in your Roth IRA or health savings account is generally the most tax-efficient strategy.

Why I don t invest in REITs? ›

However, REITs are not risk-free: they may have highly inconsistent, variable returns, are sensitive to interest rate changes are liable to income taxes may not be liquid, and can be dramatically affected by fees.

What I wish I knew before investing in REITs? ›

A lot of REIT investors will select their investments based on the dividend yield and think that a higher yield will likely lead to higher total returns. But in reality, it is often the opposite. More often than not, the lowest-yielding REITs have actually outperformed the highest-yielding REITs over the long run.

Do REITs do well in a recession? ›

REITs Outperform Stocks During Recessions

The stock market is extremely volatile during recessions. Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.

Should I hold a REIT in my IRA? ›

These trusts primarily pay through dividends and generally don't appreciate in value significantly. 1 Because of their high dividend yield, holding a REIT in your Roth IRA or health savings account is generally the most tax-efficient strategy.

What type of account should REITs be in? ›

REITs tend to have above-average dividend yields and are taxed at higher rates than qualified dividends. As we've seen, the tax reporting can also be complex. This makes them a great type of dividend investment to hold in tax-advantaged retirement accounts like traditional IRAs, Roth IRAs, and 401(k)s.

Can I hold a REIT in my 401k? ›

One of the advantages of holding REITs in a Solo 401k is the tax-deferred growth of dividends. Unlike taxable accounts, where REIT dividends are taxed at ordinary income rates, a Solo 401k allows these dividends to grow tax-deferred, enhancing compounding.

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