How To Invest In Real Estate Via ETFs

In tomorrow’s Juice we highlight — with new and frankly startling numbers — just how bad our nation’s housing crisis has become. In yesterday’s Juice, we compared the current state of housing (specifically mortgage rates) to 2023. 

If you’ve been reading this newsletter for more than a minute, you know we love to tie the larger themes we write about together. Today and all this week, we do just that. 

Because …

• Housing can have everything to do with retirement. An unfavorable housing situation — as in, a high monthly payment — can make it difficult to live well in old age. 
• Retirement investing has everything to do with ETF investing. It’s one of the easiest ways to construct a diversified, long-term portfolio. 
• You can get at sectors, such as real estate, by using ETFs. 

Of course, we often use Trackstar, our proprietary sentiment indicator, to help us make the connections and illustrate the investing aspects of the things we discuss. 

Yesterday’s Trackstar list showed the real estate ETFs individual investors have been searching for most across the platforms of our 100+ financial media partners. Today’s shows the ones financial advisors have been looking up. 

As we like to do here at The Juice, we dig into the holdings of ETFs to see the stocks they own. It matters. Because real estate is a broad category. You might not be able or even want/need to be in the market to buy a home, but you still might want some exposure to the space. So, ETFs can make a lot of sense. 

But don’t merely end your search for real estate ETFs at the keyword “real estate.” 

In case you missed it, see 3 ETF Investing Terms You Need To Know. Before you buy an ETF, you should understand each of the three terms we elaborate on in that Juice from Monday. Check those three boxes and you’re ready to move on picking ETFs. 

So, what do you get in a popular real estate ETF?

Consider the most searched fund among financial pros and the second most searched among all investors, the Real Estate Select Sector SPDR Fund (XLRE). 

First, XLRE has a super low expense ratio of 0.09%. So it’s fit for investment from a cost standpoint. The fund tracks the real estate sector of the S&P 500 and includes only real estate investment trusts (REITs). If you don’t know what a REIT is, see the installment where we define and discuss REITs. This will give you an idea of XLRE’s composition. 

In fact, every single name on today’s Trackstar list owns REITs almost exclusively. While this isn’t a bad thing, it might not be how you want to get at real estate. 

If so, you simply need to broaden your search terms. Replace real estate with housing and the types of stocks in these ETFs starts to expand. However, from our perspective, it’s still not broad enough. ETFs with “housing” in their name still tend to concentrate around REITs. 

We have found the best bang for your buck and some broad exposure is to look at homebuilder ETFs. Of course, they own homebuilders, but also consumer companies directly involved in this aspect of the housing market. 

Two of the top choices are the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB). Both ETFs have below-average, though not necessarily low expense ratios at 0.35% and 0.40%, respectively. 

The holdings are similar with top pure homebuilders, such as PulteGroup (PHM) and D.R. Horton (DHI), having a large presence. But there also names ranging from Home Depot (HD) and Lowes (LOW) to Owens Corning (OC) (a provider of housing materials), Trane Technologies (TT) (heating and cooling), Sherwin Williams (SHW) (paints), Williams-Sonoma (WSM) and Ethan Allen (ETD) (home furnishings) making appearances. 

So, if you think housing will be a strong long-term sector, REITs can be great. However, consider the domino effect of how a strong housing market benefits builders, material suppliers and consumer names who directly benefit from activity in the real estate sector. 

The Bottom Line: Maybe we’re too simple over here, but here’s how we look at it. Taking on a $7,000 payment on a $1 million-plus house doesn’t make much sense to us if it’ll stretch your budget in the least. Taking a few grand each month and investing it in some of the tickers we mention in today’s Juice can, for some people, make more sense. 

We’re not telling you what to do. Only you can decide what’s best for you. However, consider the impact of the money you send out each month on your budget, quality of life and long-term future before making any significant financial commitment.

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