Get Real with Real Estate ETPs

Investors who haven't been scared off by the weak fundamentals could benefit from the diversification and liquidity benefits of real estate ETFs

Morningstar ETF Analysts 28 February, 2011 | 1:43PM
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A Word About REITs
Most real-estate funds and ETFs invest not in corporations which own real-estate but rather real estate investment trusts, or REITs. The REIT legal structure benefits from a special tax designation for corporations first created in the U.S. in the 1960s. Their tax status drastically reduces the taxes they pay on their real estate investments. Without REIT status, a corporation which owned income-producing real estate would have to pay corporate taxes on the income received, and shareholders of the corporation would be liable for taxes on the dividends paid out from that income. The primary advantage of the REIT structure is that real estate income is not taxed at the corporate level, so more of the firm’s earnings can be passed down to shareholders. Only at the shareholder level are those dividends ultimately taxed—typically at ordinary income rates. To qualify for this tax treatment, a REIT must earn almost all of its income through real estate, and must pay out 90% of its earnings in the form of dividends. However, retained earnings remain subject to corporate taxation. Several European countries have adopted similar provisions, including the UK, France, the Netherlands, Belgium, Finland, Italy and Germany.

The largest real estate ETFs currently available in Europe track the performance of an index from one of three main series of real estate indices available. There are also a handful of smaller ETFs which follow three additional niche indices. Each of the indices is weighted by free-float adjusted market capitalisation, and components are screened for minimum size and liquidity requirements.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Morningstar ETF Analysts  research hundreds of ETFs available to European investors. The Morningstar Rating for ETFs is based on a risk-adjusted performance measure.