Real Estate ETFs

Real Estate ETFs

Real Estate as a sector has always attracted people for different reasons. Real Estate may be bought for self-use. This means that people and businesses buy land and buildings for personal use i.e. as houses or offices. The wealthy buy real estate for investment to sell later at a handsome profit. Others purchase real estate and rent it out, bringing in regular income.

Real estate is very expensive and buying real estate for the purpose of investment cannot be afforded by all. Borrowing money for investing in this sector is also not advisable. Real Estate ETFs would be the right means to invest whatever amount of money a person can afford, in real estate. This investment would serve as a hedge for inflation but would offer no solace in times of recession.  

What Are Real Estate ETFs?

  Many real estate companies are listed on prominent stock exchanges. The exchange traded funds (ETFs) which invest in these companies are called Real Estate ETFs. These ETFs may also invest a small portion of their funds in companies related to the real estate business such as tile companies and building equipment companies.  There are ETFs investing in international real estate, if you want to participate in the real estate boom worldwide.  

The Advantages of Investing in Real Estate ETFs 

In Comparison to Investing in Actual Real Estate

  • The small investor, who cannot invest in the real estate sector, finds Real Estate ETFs affordable.
  • Even for those who can afford it, real estate investing is fraught with risk as there are chances of fraud. A lot of time and money has to be spent in doing research to ensure that the seller is genuine and that the property documents are in order. Investing in Real Estate ETFs is comparatively very simple.

In Comparison to Individual Real Estate Stocks

Many stock market investors may feel that they can directly invest in real estate companies instead of ETFs. The problem is that when we make our own investments in various companies, tracking the prices of each of them on a regular basis becomes difficult. Not only that, one will have to regularly study the financial performances of these companies and exit stocks at the right time. This becomes extremely difficult for people who are not professional investors. So for a person employed otherwise, investing in Real Estate ETFs would be the best option. The ETFs would have professional managers who invest in real estate companies after thorough research and churn the portfolio as and when deemed necessary.  

Disadvantages of Real Estate ETFs 

  • Despite its advantages, many risks associated with the real estate market cannot be done away just by investing in Real Estate ETFs. When the real estate sector was booming world-wide till 2008, Real Estate ETFs were doing really well. But then the sub-prime crisis happened where easy lending policies, greed for profits on the part of companies and the investors’, greed for high returns plunged the real estate sector into great depths and of course stocks of real estate companies reached rock bottom adversely affecting Real Estate ETFs as well. 
  • Stocks of real estate companies trade at inflated prices in boom times. These companies will have large land banks quoted at exorbitant values. A slump deflates all these values and the real estate share prices will tumble leading to losses for ETF investors.
  • The fund managers may ignore the long term prospects and make investment decisions for a very short term to the detriment of the ETF investor.

While choosing Real Estate ETFs, do not get swayed by the high returns yielded by them in the past. Study whether their investments have been made in sound companies or risky entities. With a little precaution and sensible investing, Real Estate ETFs would give the investor good returns.