A REIT ETF is a specific kind of exchange-traded fund (ETF) that offers exposure to the real estate market. An ETF is a collection of securities or other products that gets put into one trackable, buyable and sellable product for easy diversified investing in a particular sector or “area” of investment. The Real Estate Investment Trust (REIT) is a fund set up for managing real estate interests, and multiple REITs can be made into an REIT ETF.
The purpose of an REIT is to provide a different way for companies or others to invest in real estate. In exchange for lower taxes on these investments, holders of an REIT agree to restrictions on payouts, where a certain percentage of gains has to go toward those who invest in the fund. REITs have become modern investment instruments that can be bought or sold on the stock market, like other securities.
An interesting thing about the REIT is that this kind of fund can be built around the purchase of residential or commercial real estate, or around mortgage-backed securities. To many financial experts, it seems inherently prudent to be cautious about investments in mortgage-backed securities or similar products, since this kind of investment is what lots of people primarily blamed for the eventual collapse of the housing market and subsequent financial turmoil in 2008. Therefore, it seems that the exact nature of a single REIT is absolutely important to the investor.
Primarily, the REIT is a tool that corporations use for channeling operating profits. When REITs are made into REIT ETF options, though, individual investors can buy into them and track their progress, speculating on their gains. The ETF is popular partly because it provides a single, easily observed platform, and can often be traded intraday, between the opening and closing bells of the market.
Investors who are looking at any kind of product tied to an REIT will want to know what kind of real estate the fund is built on. They’ll want to understand the ratings of various firms and look at the chances of the mortgages or derivatives remaining solvent, particularly in a volatile market. All of this is often called “due diligence,” where the investor goes beyond the surface of a product to find out how likely they are to realize gain rather than absorb loss. For an REIT ETF, this kind of research is ultimately important.