Why REIT ETFs Still Work as Real Estate Slumps

The struggle of brick-and-mortar real estate has extended into investment portfolios.

Why it matters: Elevated inflation and high interest rates have weighed on the real estate sector over the past few years. Real estate investment trusts or REIT ETFs have not been spared. Yet these exchange-traded funds are popular among income investors. They generate cash and can help diversify a portfolio. So, where do they fit in yours? And which REIT ETFs do Morningstar analysts consider top picks?

Dan Sotiroff is the associate director of US Passive Strategies for Morningstar and editor of Morningstar’s ETFInvestor newsletter.

12 Questions on REIT ETFs

1. Let’s start with an explainer. What is a real estate investment trust ETF or REIT ETF, and how do they work?
2. What makes REITs different than other stocks?
3. What type of strategies do REIT ETFs typically use?
4. There are passive and active REIT ETFs. Are the higher fees for active REIT ETFs worth it? What are income investors paying for?
5. Are there any underlying characteristics that differentiate some funds from others?
6. Let’s talk about performance. How have REIT ETFs performed?
7. The yearslong fight against inflation pushed up interest rates and created a challenging environment for real estate. The Federal Reserve is holding rates steady after three rate cuts last year. What has been the performance of REIT ETFs versus the broader stock market since 2022?
8. Income is the name of the game with these funds. How can income investors minimize their tax bills? What’s the best location to hold these investments?
9. Let’s discuss the different types of REIT ETFs and what Morningstar analysts think of them. First up, broad-based ETFs. What will investors generally find in these funds, and which earn silver or gold rating?
10. If an income investor wants to focus on US real estate, which funds are doing well in this area?
11. And what about investing in real estate outside the US?
12. What’s the takeaway for income investors considering adding a REIT ETF to their portfolio?

Key Quote on REIT ETFs During High Interest Rate Environment

If you think about how they’re structured, they have to return a lot of their profits to investors as income distributions. So that means they don’t have retained earnings to buy new properties or reinvest in their business. So they have to finance much of their activities. That means their financing costs are closely tied to the current interest rate when they take on debt or loans or anything like that. So they’re very sensitive to the interest rate cycle. And we’ve seen that over the last four years.

The Takeaway: The appeal of income might lead some investors to make a bigger bet on REIT ETFs than they should. The real estate sector makes up a small part of the overall stock market. It can range from 2%-3% depending on market conditions, according to Sotiroff. Allocating more than that to the niche area might not pay off. REIT ETFs have struggled against the market over the past 15 years. Yet many investors are still interested in the income. The editor of Morningstar ETFInvestor newsletter says investors could consider broader strategies like dividend-paying and covered call strategies that don’t make big sector bets like REITs.

More From Morningstar on Passive and Active REIT ETFs

Active managers are holding a slight edge against their passive peers in the real estate category. But Sotiroff says it’s not dramatically higher. He encourages income investors to watch where the performance is coming from to determine if active REIT ETFs’ higher fees are worth it to them. Check out two articles that dissect what investors need to know about passive REIT ETFs and active REIT ETFs.

Susan Dziubinski, Morningstar investment specialist and co-host of The Morning Filter, tackles the pros and cons of investing in REIT ETFs. And watch 9 Top ETFs for Income Investors That Stood Out in 2025.

Securities mentioned in this episode:

Vanguard Real Estate ETF VNQ

Schwab US REIT ETF SCHH

Dimensional US Real Estate ETF DFAR

Vanguard Global ex-US Real Estate ETF VNQI