A Battle of REIT ETFs: Which REIT ETF Offers Better Value for Income-Oriented Investors?

State Street Real Estate Select Sector SPDR ETF (NYSEMKT:XLRE) provides low-cost exposure to the S&P 500 real estate sector, while iShares Select U.S. REIT ETF (NYSEMKT:ICF) offers a more seasoned portfolio with higher recent returns.

Real estate investment trusts often serve as a pillar for income and diversification. This comparison looks at two different ways to access the asset class: the State Street fund captures the real estate components of the primary S&P 500 index, whereas the iShares fund tracks a specific group of U.S. REITs selected for their size and market prominence. Both portfolios are relatively concentrated, yet they differ in their cost structures and selection criteria. This analysis examines their costs, historical risk metrics, and the underlying holdings that drive their performance.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The State Street fund is significantly more affordable, with an expense ratio of 0.08%, representing a savings of 0.24 percentage points compared to the iShares fund. Additionally, income-oriented investors may find the State Street fund's higher trailing distribution yield of 3.5% more compelling for generating regular cash flow.

Performance & risk comparison

What's inside

iShares Select U.S. REIT ETF focuses on leaders in the domestic real estate sector, though it does not report a sector breakdown. Its largest positions include Equinix (NASDAQ:EQIX) at 8.54%, Welltower (NYSE:WELL) at 8.35%, and Prologis (NYSE:PLD) at 7.99%. The portfolio concentration reflects its strategy of holding dominant firms in their industries. It holds 30 positions in total. The fund was launched in 2001. iShares Select U.S. REIT ETF has paid $1.74 per share over the trailing 12 months, which, at its recent ~$62.6 share price, works out to a 2.7% yield.

State Street Real Estate Select Sector SPDR ETF focuses on the 30 real estate companies in the S&P 500, providing exposure to the sector's largest equity players. Its largest positions include Welltower at 11.64%, Prologis at 8.69%, and Equinix at 7.18%. This approach provides targeted access to real estate management and development firms while excluding mortgage REITs. It holds 30 positions in total. The fund was launched in 2015. State Street Real Estate Select Sector SPDR ETF has paid $1.44 per share over the trailing 12 months, which, at its recent ~$40.7 share price, works out to a 3.5% yield.

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Which looks like the better buy

When comparing the State Street Real Estate Select Sector SPDR ETF (XLRE) and the iShares Select U.S. REIT ETF (ICF), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should discuss the differing strategies of each fund. XLRE is designed to provide exposure to large-cap real estate companies within the S&P 500. ICF, on the other hand, holds the largest and most liquid real estate companies. In truth, there is significant overlap between the two funds, with each fund's major holdings dominated by REITs such as Equinix, Welltower, and Prologis, albeit with different allocations.

Two other important factors are historical performance and income potential. As for performance, the two funds share a very similar profile. XLRE has generated a total return of 10.5% over the last five years, with a compound annual growth rate (CAGR) of 2%. ICF, meanwhile, has delivered a total return of 11.4% with a CAGR of 2.2%. Turning to income potential, XLRE has an edge. Its dividend yield of 3.5% is moderately higher than ICF's 2.7%.

One final factor to weigh is cost. Here, again, XLRE has an advantage. XLRE's expense ratio is 0.08%, making the fund quite affordable. ICF's expense ratio is 0.32%. For context, a person who invests $10,000 in each fund would expect to pay $8 in annual fees for their XLRE shares and $32 in annual fees for their ICF shares.

To sum up, although XLRE and ICF are both REIT ETFs, they offer contrasting profiles. Overall, their strategies and performance histories are quite similar. However, on both income potential and fees, XLRE comes out ahead. Therefore, it will likely be the choice for most income-oriented investors.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equinix and Prologis. The Motley Fool has a disclosure policy.