Exchange Traded Fund vs. Real Estate Investment Trust

As a new household, part of your financial planning may be to set up an investment program. Financial companies and stock brokerage firms offer a range of investment types from which to choose. The best choice for you depends on your investment goals and risk tolerance. Exchange traded funds provide low-cost investment access to a wide range of asset types, while real estate investment trusts are an easy way to invest in commercial real estate and earn income.

Exchange Traded Funds

An exchange traded fund -- ETF -- holds a portfolio of securities or other financial assets, and investors buy shares of the fund through a stock brokerage account. A stock or bond ETF holds securities to match a specific market index. For example, you can invest in ETFs that hold the all of the stocks tracked by the widely followed S&P 500 index. Stock ETFs are available to provide investments in a large number of stock market subsectors, including international stocks and specific market sectors such as financial stocks or energy stocks. Other ETFs provide investment opportunities in alternate asset classes, such as precious metals or commodities.

Real Estate Investment Trusts

A real estate investment trust -- REIT -- is a company formed under a special tax rule to invest in commercial real estate or mortgage investments. Shares of a REIT trade on the stock exchange and can be bought and sold like any stock. Tax rules require a REIT to pay out at least 90 percent of earnings to shareholders in the form of dividends or distributions. As a result, most REIT stocks have attractive dividend yields and are purchased for the income they provide to an investment portfolio. A real estate investment trust usually focuses on one sector of commercial real estate, such as office buildings, medical facilities, apartment complexes or hotels/lodging. Mortgage REITs are another sector that invests in commercial or residential mortgages, either directly or through the purchase of mortgage-backed securities -- MBS.

Passive vs. Active Management

A major difference between ETFs and REITs lies in how the investments are managed. An exchange traded fund is not actively managed. A fund holds securities to match a specific index or commodity price, and has no management team attempting to provide additional value. The investment returns of an ETF come from the securities held by the fund. A real estate investment trust is an actively managed company with a management team working to increase shareholder value. The management of a REIT's holdings can include buying and selling properties plus developing and building commercial properties to add value. REIT companies can merge with or buy out other real estate companies.

Choosing Your Investment

Both ETF and REIT shares are purchased through a stock brokerage account, and you can buy shares of both types of investment if they fit your goals. REIT shares provide exposure to the different commercial real estate sectors and usually pay higher dividend yields than the average for other stocks. ETF shares provide investment exposure to either the broad stock market using one or two funds or offer the ability to focus on specific market sectors. The commodity-focused ETFs provide investment exposure to an additional investment class. Selecting specific REITs in which to invest will require more in-depth analysis of the companies. An ETF provides a diversified investment in a single security, so the analysis required concerns the market or sector an ETF covers.


About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.