You've no doubt heard that for the last several years the real estate market has been hot with returns exceeding many other asset classes. Fortunately for stock market investors there is a way to tap in to that growth with Real Estate Investment Trust (REIT) ETFs.
REITs are companies that own and operate portfolios of commercial and residential real estate. Unlike typical companies they are required to pay out much of their profits in the form of dividends to qualify for corporate tax breaks. This payout plus the belief that REITs will not move together with stocks makes them an important diversification tool.
As with other ETFs, the REIT ETFs are baskets of stock of multiple companies. Barclay's offers two such REITs: one based on Cohen & Steers Realty Majors Index (ICF) and one based on the Dow Jones U.S. Real Estate Index (IYR). Both are very similar, but the Cohen & Steers index has an expense ratio of 0.35% vs. the Dow Jones Realty Index expense ratio of 0.60%.
As I wrote in a posting on tax efficiency, I believe it can make sense from a tax perspective to hold REIT ETFs within a tax deferred account.