Real estate has dominated headlines in recent years, from rising home prices and affordability concerns to speculation around interest rates and housing demand. As consumers continue to watch the market closely, many investors are looking for ways to gain exposure to real estate without buying physical property.
That’s where REITs, or real estate investment trusts, come in. A REIT is a company involved in owning, operating, or financing income-producing real estate. The REIT must distribute 90% or more of the income it produces to its shareholders in the form of dividends. This allows investors to receive regular payments sourced from real estate while avoiding the time and effort of property management.
While most consumers interact with real estate through buying or renting homes and apartments, REITs offer access to a broader spectrum of properties, such as shopping centers, cell towers, and data centers, that are typically out of reach for individual ownership. Many REITs specialize in specific sectors of the real estate market, allowing investors to target particular themes or industries. However, for those seeking diversified exposure across multiple property types, REIT-focused exchange-traded funds and mutual funds provide a convenient solution.
Where to Begin
There are numerous factors to consider when selecting a real estate fund for your portfolio. Things like fees, regional exposure, active or passive management, and what yield to expect are all important factors. Four funds stand out as good options for investors that each have a different perspective on real estate exposure.
SPDR Dow Jones Global Real Estate ETF RWO and Vanguard Global ex-U.S. Real Estate ETF VNQI provide global diversification by investing in real estate across multiple countries, offering exposure that individual US investors would find challenging to access on their own. In contrast, Schwab U.S. REIT ETF SCHH and DFA Real Estate Securities DFREX concentrate on the US real estate market, diversifying across subindustries such as retail, residential, industrial, and healthcare.
Both groups provide investors with diversified real estate exposure but focus on different markets. Diversification is important across many investment styles, but especially for real estate investors. It can mitigate risks, stabilize yield, and enhance performance.
Location, Location, Outperformance
Looking at the four funds listed above, an investor would have had very different results depending on the fund they chose. Since all four have been on the market, Jan. 14, 2011, the funds that focused on the US real estate market produced the highest returns while foreign markets lagged. The global fund with exposure to both foreign and US markets performed as expected, falling between these two geographic categories.
Vanguard Global ex-U.S. Real Estate ETF offers the greatest exposure to international real estate, but its exclusion of the US market hurts its relative performance. Over an almost 15-year period, investors earned just 3.5% annualized, leaving them with just $16,251 on an initial $10,000 investment.
Had an investor chosen any of the funds that included US real estate, they would have at least doubled their initial investment. And had they chosen the actively managed DFA Real Estate Securities, the initial investment of $10,000 would have more than tripled over the same period.
The top two performers, DFA Real Estate Securities and Schwab U.S. REIT ETF, produced nearly identical results for a long time. However, Schwab U.S. REIT ETF underperformed DFA Real Estate Securities by almost 10 percentage points in the first half of 2020 and hasn’t caught up since. Clearly, these funds had very different holdings despite seeking to represent the same market.
Variations of American Real Estate
A benefit of the actively managed DFA Real Estate Securities is that it seeks broad US real estate exposure, like most index funds in the US real estate Morningstar Category but also seeks out small specialty REITs. Most index funds exclude REITs that are deemed too specialized or don’t meet their market-capitalization or liquidity requirements.
In 2017, DFA Real Estate Securities began to allocate a small portion of its assets to telecom tower REITs—a category that Schwab U.S. REIT ETF wouldn’t touch until mid-2020, when it changed its index to better represent the broad US real estate market. By the time Schwab U.S. REIT ETF included telecom tower REITs, DFA Real Estate Securities had almost 20% of its assets invested in that subindustry. Tracking Schwab U.S. REIT ETF’s holdings gives a good view into how its index has changed since inception.
Halfway through 2020, we see a spike where the number of holdings held by Schwab U.S. REIT ETF increases by over 50%. At the same time, the allocation to telecom tower REITs goes from 0 to over 20% of the fund’s assets. Other real estate subindustries long held by DFA Real Estate Securities, like data center and industrial REITs, also began filling Schwab U.S. REIT ETF’s portfolio.
Indeed, Schwab U.S. REIT ETF’s new target index closely mirrored DFA Real Estate Securities since its index changed in June 2020 and has even slightly outperformed over the past five years due to its lower fee. Whether or not this trend will continue is hard to say.
In the years prior to Schwab U.S. REIT ETF’s index change, DFA Real Estate Securities had a clear edge over other US real estate peers. The team at Dimensional recognized the opportunity in telecom tower REITs and was able to act on it decisively. Passive peers had to change their index or adjust their methodology to include the subindustry. These options led to increased turnover and slow adoption by passive funds. In the case of Schwab U.S. REIT ETF, the fund’s turnover increased from 6% to 59% when it began including telecom tower REITs three years after DFA Real Estate Securities.
DFA has had few opportunities to differentiate DFA Real Estate Securities’ portfolio during the past five years. But that doesn’t mean it can’t happen again.
The Global Real Estate Category’s Motley Crew
Global real estate funds’ performance can largely be explained by their country exposures rather than real estate subindustry exposures. The biggest difference is that global and international (that is, global ex-US) sit in the same category. Global funds like SPDR Dow Jones Global Real Estate ETF tend to allocate over half of their assets to US real estate, while those that exclude the US mostly overweight Japan and the greater Asia-Pacific region.
International real estate has followed the trend of international stocks by underperforming the US market. Comparing regional exposures between these funds defined the performance gap between SPDR Dow Jones Global Real Estate ETF and Vanguard Global ex-U.S. Real Estate ETF.
SPDR Dow Jones Global Real Estate ETF’s 70% allocation to the US market is even more concentrated than many peers. This overweighting has generally benefited the fund’s performance, but virtually everything is riding on US real estate compared with a better diversified fund like Vanguard Global ex-U.S. Real Estate ETF.
Vanguard Global ex-U.S. Real Estate ETF is one of the most geographically diversified funds in the global real estate category. Unfortunately for the fund, however, being diversified hurt its performance relative to peers.
In 2025, US real estate dominance has faltered. Looking at our same four funds, Vanguard Global ex-U.S. Real Estate ETF has been the clear top performer so far this year. International real estate’s albatross around its neck appears to be the cause of the current year’s stardom.
Whether international real estate will continue to outperform is unclear. It is important to remember that past performance is not indicative of future results.
Conclusion
Real estate ETFs and mutual funds can be a great option for investors looking for passive income sourced from real estate activities. REITs take care of day-to-day management and must pay the vast majority of their net income to investors in the form of dividends.
US and international funds have each had their day in the sun. While US-focused real estate has dominated historically, we may be seeing a turning point for international equities. It is impossible to say what will happen next, but high-quality real estate funds are available to investors whether diversifying internationally or locally.