Can someone help clarify how a real estate ETF works?
Given that real estate is tangible, whereas ETFs traditionally track intangible assets (stocks), how are real estate ETF valued if they are tangible goods? This feel like a dumb question.
In: Economics
Like a standard ETF real estate ETFs hold shares of companies that own the real estate, not the real estate itself. The ETF value is derived from the underlying shares’ prices. A real estate company can own a building and it be part of the asset value much like how Apple can own a building, really no difference there.
ETFs are just a mutual fund that “acts” like a stock. You can bundle any type of basket of companies into one you want. Or commodities or anything. ETFs aren’t special. Mutual funds and them are very very similar, almost totally thr same. ETFs are kinda mutual funds v1.1.
Real estate companies generally do two main things. Collect rent and their assets (real estate) goes up in value. They don’t need to “make” anything to have value and create wealth and go up in value.
Additionally there is a subset of real estate investments called REITs (Real Estate Investment Trusts) that have special rules. Basically you can invest in these companies and they are legallly required to pay dividends to their owns a certain amount of their income. It’s more or less like you’re buying in as a landlord for the properties they own, they collect rent and pay it to you each quarter like you’re a part owner landlord.
If I buy a house, I buy a house.
If I form a company to buy houses and shopping centres, the company owns the houses and shopping centres. But I don’t, I just own the company. I’m still “invested in real estate”, even though I don’t actually own any. I just own a company.
Maybe my cousin Vinny wants to buy some real estate – he’s just started his law career and has earned $1000 from his first case. Sadly, there are no properties available for $1000. But he can buy a share in my company. Now he’s invested in real estate, even though all he owns is a share in a company.
Maybe my real estate company becomes so successful that I decide to list it on the stock exchange. Now hundreds or thousands of people can buy shares in my real estate company. They might think they’re investing in shares, but if the only stock they bought was mine, they’re really invested in real estate.
Maybe lots of other companies also do the same thing – invest in real estate, and list themselves on the stock exchange.
Now, maybe a fund manager decides “rather than investing in individual real estate companies, let’s set up a managed fund to invest in all of them”. Then, Vinny can go to this fund manager “ABC Real EstateTrust”, and invest $1000. That $1000 is then pooled with a million other small investors, and ABC Real Estate Trust buys shares in real estate companies. Vinny is still invested in real estate, even though he doesn’t own any real estate. He doesn’t even own any shares in companies that own real estate. Instead, he has a share in “ABC real Estate Trust” (which also doesn’t own real estate, they own shares in companies that own real estate).
Finally, ABC Real Estate Trust decides to launch an exchange-traded fund. Now you don’t have to open an account with them directly, you can just buy shares in the ETF. They you will be invested in real estate because you own shares in an ETF that is backed by a managed fund that owns shares in dozens of companies that each individually own lots of real estate.
The tangible assets are there, but they are hidden behind lots of paperwork.
Real estate ETF’s are typically just industry-specific funds investing in REIT stocks. The ETF isn’t directly buying properties, it’s buying shares in companies like CoStar, Equity Residential, Public Storage, Prologis that own and operate real estate holdings.
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