Our Favorite Domestic REIT Funds
These funds provide consistent, cheap exposure to the U.S. real estate market.
Real estate funds can play an important role in diversifying a portfolio, because real estate returns tend not to be too highly correlated with either the broader stock market or the bond market. Also, because real estate investment trusts tend to pay healthy dividends, these stocks are often seen as income plays. That has broadened their appeal in recent years, as low interest rates have left many investors seeking income wherever they can find it.
Here are four of our favorite picks in the real estate Morningstar Category, which includes funds that invest primarily in domestic (U.S.-based) REITs. All are Morningstar Medalists with long-tenured managers, strong track records, and reasonable price tags.
T. Rowe Price Real Estate (TRREX)
This fund, the only one in its category with a Morningstar Analyst Rating of Gold, has a lot of good things going for it. David Lee has been at the helm since the fund’s 1997 inception, and over that time he has consistently used a disciplined strategy grounded in real estate fundamentals. Lee seeks to hold REITs (and occasionally real estate operating companies) whose underlying properties have attractive real estate features, especially in terms of location and length of leases, and he’ll generally hold only stocks that are trading below the net asset value of their underlying properties.
That cautious approach has caused him to avoid some of the hottest areas of the REIT market in recent years, such as healthcare, data center, and cell tower REITs, thus hurting the fund’s short-term performance. However, the fund’s long-term returns remain excellent, outpacing the real estate category over the trailing five and 10 years through March 23, 2018, and beating three fourths of its category peers over the past 15 and 20 years. Also, its 0.74% expense ratio is among the lowest of any actively managed fund in the category, making it a real bargain.
Vanguard Real Estate Index (VGSLX)
This Silver-rated fund is by far the biggest U.S.-sold real estate fund. It has more than $60 billion in assets across all share classes, including the exchange-traded fund version, Vanguard Real Estate ETF (VNQ). Gerard O’Reilly has managed it since its 1996 launch, and like all Vanguard index funds, it has done an excellent job of tracking its benchmark. Until recently, it tracked the MSCI U.S. REIT Index, which does not included mortgage REITs or non-real estate REITs such as those focused on timber or cell towers. As of early 2018, it is transitioning to the MSCI U.S. Investable Market Real Estate 25/50 Index, which does include those noncore REITs and which will give the fund broader exposure and a somewhat higher risk profile. The fund is also cheap, with expense ratios of 0.12% for the Admiral shares and the ETF version and 0.10% for the Institutional shares.
Fidelity Real Estate Investment (FRESX)
This is another real estate fund with a long-tenured manager; it's been run by Steve Buller for the past 20 years. He uses an eclectic strategy that’s centered on bottom-up fundamental analysis, but it also draws on quantitative models, top-down macro analysis, and technical factors such as capital flows. A varied approach like that can be tough to pull off successfully, but this fund has been a consistently solid performer under Buller. It has beaten the real estate category in 15 of 20 calendar years from 1998 through 2017, and over the trailing three, five, 10, 15, and 20 years through March 23, 2018. It’s also reasonably priced, with a 0.76% expense ratio. All that earns a Morningstar Analyst Rating of Bronze.
Cohen & Steers Realty Shares (CSRSX)
Cohen & Steers was one of the pioneers of real estate investing back in the early 1990s, and this Bronze-rated fund is its flagship. Founders Martin Cohen and Robert Steers were managers from its 1991 inception to 2013, but now a team led by Thomas Bohjalian runs the fund using a combination of top-down and bottom-up analysis. Like the other funds listed here, it has been a strong, consistent performer for more than a decade; it has outpaced about 90% of the category over the past 15 and 20 years, and has done similarly well in the five years that Bohjalian has been in charge. It’s not as cheap as the other funds discussed here, with a 0.96% expense ratio, but it’s still cheaper than the average no-load fund in the category.
David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.