A REIT fund is a mutual fund or exchange-traded fund that invests in real estate investment trusts

A REIT fund pools money from many investors and uses it to buy shares in multiple REITs. You do not own property directly. Instead, you own a small piece of a fund that owns pieces of many REITs, which themselves own or finance real estate. The fund manager decides which REITs to buy and sells them when the manager thinks the time is right.

When you buy into a REIT fund, you are buying a share of that fund's holdings. The fund receives dividends from the REITs it owns, and those dividends are passed to you. You can also make money if the fund's share price rises. You can lose money if it falls.

REIT funds come in two main forms: mutual funds, which you buy and sell once per day at a set price, and exchange-traded funds (ETFs), which trade throughout the day like stocks. Both hold the same basic thing — a collection of REIT shares — but they work differently in practice.

Key Takeaways

  • A REIT fund holds shares in many different REITs, spreading your money across multiple properties and property types rather than betting on one REIT.
  • You receive dividend income from the REITs the fund owns, and the fund passes most of those dividends to you as distributions.
  • REIT funds can be mutual funds (priced once daily) or ETFs (traded throughout the day), and each has different costs and tax treatment.
  • The fund manager actively picks which REITs to buy and sell, or the fund tracks a REIT index passively with lower fees.

Active versus passive REIT funds

An active REIT fund employs a manager who researches REITs, decides which ones to buy and hold, and sells them when conditions change. You pay the manager a fee for this work, usually between 0.5% and 1.5% of your investment per year. The manager's goal is to beat the market — to pick REITs that will perform better than the average.

A passive REIT fund or index fund tracks a published REIT index, such as the MSCI US REIT Index or the Dow Jones US Real Estate Index. The fund simply buys all the REITs in that index in the same proportions. There is no manager making picks, so fees are much lower — often 0.1% to 0.4% per year. You get the average market return, not a bet that the manager can beat it.

Neither approach is inherently better. Active funds sometimes outperform their index, sometimes underperform. Over long periods, most active REIT funds underperform their benchmark after fees are subtracted. Passive funds may provide you will match the index, minus the small fee.

How dividends and distributions work

REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends. When a REIT fund owns those REITs, it receives those dividends. The fund then passes them to you as distributions, usually quarterly or monthly.

The distribution amount varies. It depends on how much income the REITs in the fund earned, which depends on rent collected, occupancy rates, and property values. A fund holding apartment REITs will distribute differently than one holding data center REITs. During economic downturns, distributions often fall because tenants pay less rent or move out.

Distributions are taxed as ordinary income in the year you receive them, even if you reinvest them. This is different from stock dividends, which often may have access to for lower tax rates. That tax treatment makes REIT funds more efficient inside retirement accounts like IRAs or 401(k)s, where distributions are not taxed until you withdraw money.

Types of properties REIT funds can hold

REIT funds vary widely in what kinds of real estate they own. Some funds focus on a single property type — apartments, office buildings, shopping centers, warehouses, data centers, or hotels. Others hold a mix. A diversified REIT fund might own shares in REITs that collectively hold apartments, industrial warehouses, medical offices, and retail space.

The property type matters because different sectors perform differently depending on economic conditions. Apartment REITs tend to be stable because people always need housing. Retail REITs suffered during the shift to online shopping. Data center REITs have grown as cloud computing demand increased. A fund focused on one type concentrates your risk; a diversified fund spreads it.

Some REIT funds also hold mortgage REITs, which lend money to real estate developers and owners rather than owning property directly. Mortgage REITs behave differently from property REITs and carry different risks. Check the fund's description to see what mix it holds.

Costs and fees you will encounter

When you buy a mutual fund REIT, you may pay a sales charge called a load — typically 3% to 6% of your investment. This goes to the broker or financial advisor who sold it to you. Some mutual funds are no-load, meaning you pay nothing upfront. ETFs do not have loads; you pay only the market price when you buy, like buying a stock.

Every REIT fund charges an annual expense ratio, the percentage of your investment the fund deducts each year to cover management and operating costs. Active REIT mutual funds typically charge 0.5% to 1.5% per year. Passive REIT ETFs charge 0.1% to 0.4%. Over decades, that difference compounds significantly.

If you buy or sell through a brokerage, you may also pay a trading commission, though many brokerages now offer commission-free trading on ETFs. Check your brokerage's fee schedule before you buy.

Risk and volatility in REIT funds

REIT fund shares rise and fall in price based on investor demand and the underlying REITs' performance. During recessions, when commercial real estate values fall and tenants struggle to pay rent, REIT funds often decline sharply. During economic expansions, they tend to rise. Interest rate changes also affect REIT prices — when interest rates rise, borrowing becomes more expensive for REITs, which can pressure their stock prices.

A REIT fund is less risky than owning a single REIT because it spreads your money across many REITs and property types. But it is riskier than bonds or money market funds. If you need the money in the next few years, a REIT fund may not be the right place for it because you might have to sell during a downturn.

Leverage also matters. Some REITs borrow heavily to buy more property, which amplifies both gains and losses. A fund holding highly leveraged REITs will be more volatile than one holding conservative REITs. The fund's prospectus describes the average leverage of its holdings.

Geographic and international REIT funds

Most REIT funds focus on US real estate because the US REIT market is the largest and most transparent. Some funds hold only US REITs; others mix US and international REITs. A few focus entirely on real estate outside the United States — Europe, Asia, or emerging markets.

International REIT funds add currency risk. If you buy a fund holding European REITs and the euro falls against the dollar, your fund's value falls even if the REITs themselves perform well. Some international REIT funds hedge this currency risk; others do not. The prospectus will say which.

International real estate markets also have different regulations, tax treatment, and economic cycles than the US market. A fund holding Japanese office buildings behaves differently from one holding Australian shopping centers. Diversification across geographies can reduce risk, but it also adds complexity.

Frequently Asked Questions

Can I buy a REIT fund inside a retirement account?

Yes. REIT funds can be held in IRAs, 401(k)s, and other tax-advantaged accounts. This is actually a common strategy because REIT distributions are taxed as ordinary income, which is inefficient in taxable accounts. Inside a retirement account, the distributions grow tax-deferred until you withdraw.

What is the difference between a REIT fund and owning a REIT directly?

A REIT fund holds many REITs; owning a REIT directly means buying shares in one company. A fund spreads risk across multiple REITs and property types. A single REIT concentrates your bet on one company's management and properties. Funds also charge fees; direct REIT ownership does not.

Do REIT funds pay dividends every month?

Most REIT funds distribute dividends quarterly, though some distribute monthly or annually. The frequency depends on the fund. Check the fund's fact sheet or prospectus to see its distribution schedule. The amount also varies based on the income the underlying REITs earned.

What happens to a REIT fund during a recession?

REIT funds typically decline during recessions because property values fall and tenants struggle to pay rent. The decline is usually less severe than the stock market's decline, but it can still be significant. Apartment REITs tend to hold up better than retail or office REITs during downturns.

Should I choose an active or passive REIT fund?

Passive REIT funds charge lower fees and match the market return. Active REIT funds charge higher fees and sometimes beat the market, but most underperform after fees over long periods. If you believe a manager can pick better REITs, choose active. If you want lower costs and predictable returns, choose passive.