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Real Estate ETF vs. Mutual Funds

By: Elite Legacy Education, May 10, 2017

Real Estate ETF vs. Mutual Funds


We’ve discussed the differences between exchange traded funds (ETFs) and mutual funds in the past. But let’s focus specifically on real estate ETFs and mutual funds.


How do ETFs and mutual funds differ from other real estate investments like REITs?


Let’s recall what a REIT is. REITs are available in a variety of types and may differ based on what assets they invest in. Some invest directly in properties, while others invest in mortgages. In some cases, a REIT may invest in both properties and mortgages. As you can see, a single holding company manages each REIT.


This is where the difference lays when you compare REITs to real estate ETFs and mutual funds. Either of the latter two investment options could hold claims on an assortment of REITs. While shares in other real estate related investments may be included in these as well.


The benefits of real estate ETFs and mutual funds.


Now that we understand what differentiates these investments from REITs, we can begin exploring the advantages they offer. Some of these are shared with REITs, while others are unique to ETFs and mutual funds. Consider the following.


  • Diversification at a lower cost. Rather than having to invest your money separately into several REITs, you can simply purchase an ETF or mutual fund that does this for you. By doing so, you will save on transaction costs. Also, you benefit from the diversification itself. This will leave you less exposed to the performance of a single REIT.
  • Increased liquidity. Especially with ETFs, these investment vehicles offer superior liquidity since they trade throughout the day. Mutual funds also offer great liquidity but not as much as ETFs. This is primarily due to the fact that mutual funds only trade at the end of the day rather than throughout. You can also look at this in comparison to a typical property investment. These kinds of deals are not nearly as liquid compared to when you invest through these asset types.
  • Tax benefits passed through. If you remember, REITs offer significant tax advantages to investors when 90% of income is paid in dividends. By holding REITs through an ETF or mutual fund, you still experience these benefits. Beyond that, the tax treatment of REITs, ETFs and mutual funds is similar from an investor’s standpoint since they are all subject to similar rates.
  • Access for smaller scale investors. This is similar to a benefit offered by REITs. Investing directly in property can require significant upfront investment with further financing to support it. Unfortunately, not all investors can afford this. Instead, ETFs and mutual funds allow investors of all sizes to partake in real estate investing.
  • Hedge against inflation. Common for real estate investments, these act as a hedge against inflation. Compared to other industries, real estate still performs well in times of inflation. This is generally based on the fact that rent prices increase alongside inflation.


So although real estate ETFs and mutual funds may initially seem similar to REITs, there are unique advantages of each. Again, no single option is the best option. It really comes down to your personal situation and investment objectives. Some traders may feel more comfortable investing in REITs, while others may prefer ETFs or mutual funds.


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