Real Estate ETF, how does it work?
Investing in real estate is extremely popular among investors. Real estate is often called ‘concrete gold’, because in general real estate stands for safety and value retention. Investing by buying houses is a big investment, fortunately as an investor you can also choose more accessible options: you can also invest indirectly in real estate via shares of real estate funds and ETFs. We will discuss the latter in more detail in this blog, because how exactly does investing in real estate ETFs work?
What is a real estate ETF?
Many Dutch people consider buying a second home, for example by taking the equity out of their first home. Another disadvantage of investing directly in real estate is that this is a considerable amount right away. In addition, this method also provides little diversification. With an ETF you can invest in real estate with small amounts and more diversification. But what exactly is a real estate ETF?
A real estate ETF is an index tracker that follows a number of real estate companies. It works the same as all other ETFs, but focuses on the real estate market. Don’t know what an ETF is in general? Then read our article: ‘ What is an ETF? ‘.
Investing in real estate ETFs, how does it work?
To invest you need an account with a broker . When you have a broker that offers real estate ETFs you can start investing in real estate ETFs.
If you have an account with a broker offering real estate trackers, it is important to choose a real estate ETF. There are different types of real estate ETFs. For example, one may focus on office buildings in the EU and another on shopping centres in the United States. As an investor, you have quite a bit of choice.
How do you make money with it?
Have you chosen an ETF? Then you can add it to your portfolio by purchasing the ETF. You can now earn money from this real estate ETF in two ways:
- Price gain
- Dividend payment
An ETF has, just like a share, a certain value. That value changes every day. You can make a profit when you sell the ETF for a higher price than the purchase price. In general, if the economy is doing well, the value increases.
Of course, the value can also fall; if you sell the ETF for a lower value, you will therefore incur a loss in value.
Dividends for an ETF differ per ETF. With an ETF, you are actually buying a number of shares within that ETF. For these shares, you can receive a profit distribution. This is entirely passive.
The downside: what are the risks?
Although real estate is seen as a valuable asset and ‘concrete gold’, it carries risks just like all other forms of investment.
There are ways to avoid risks. For example, you can look at the ESG score for a real estate ETF . This can give an indication of the future-proofness of an ETF. In addition, you look at other factors for an ETF. For example, you look at the return, the size of the ETF or the region. Risk and return often go hand in hand. The higher the return, the higher the risk. A larger ETF means more diversification and less concentration risk .
The real estate ETF has everything to do with the housing market. If the housing market is healthy, your ETFs will do well. If the housing market falls, your ETF will follow this development.
Real Estate ETF Benefits
The real estate ETF has a number of advantages, such as:
- The high degree of diversification. You can invest in multiple sectors of real estate or in different regions with a real estate ETF.
- Receiving dividends. Real estate ETFs often have a high dividend yield.
- Low entry level. There is no need for a large investment, which is required for a direct investment in real estate. For example, you can buy a real estate ETF for around €50 per share.
- High liquidity. An ETF is traded on the stock exchange, so you can sell your real estate ETF more easily and quickly.