Real Estate ETF Growth Means Increased Retail Exposure to REITs

As capital continues to flow into real estate ETFs, the sector is both evolving and expanding, with new entrants that are focusing on active and differentiated strategies.

The majority of real estate ETFs invest in REITs and the pace of growth has meant that, “at least for the world of REIT ETFs, you have to have something that is completely different, unique, or compelling to garner attention,” says David Auerbach, chief investment officer of Hoya Capital, which manages two ETFs, Hoya Capital High Dividend Yield ETF (RIET) and RIET and Hoya Capital Housing ETF (HOMZ).

Lower fees, liquidity, tax efficiency, and transparency are all key factors fueling growth across the broader ETF market, which has more than doubled in size since 2019. The total universe of ETFs globally now spans 4,377 with total AUM of $11.7 trillion, according to VettaFi. Although real estate ETFs represent a small subset of that universe, with 64 ETFs and $81 billion in AUM, the vehicle is continuing to attract steady inflows—and in turn is extending the REIT industry’s reach into the retail market.

Real estate ETFs differentiate themselves from other vehicles by offering investors access to diversified portfolios of high quality real estate in an efficient wrapper that has a minimal investment threshold. An investor can buy a single share in an ETF.

“We believe listed REITs have always been the most efficient, liquid, and cost-effective way for investors to access the highest quality CRE,” says Greg Kuhl, portfolio manager on the global property equities team at Janus Henderson Investors. “The proliferation of REIT ETFs brings these benefits together in a package that many investors may find is the best way to implement real estate exposure in their portfolios,” he says. Janus Henderson launched its US Real Estate ETF (JRE) in 2021.

Yet real estate ETFs have been bumping into some headwinds in recent years, largely due to the tough fundraising climate for real estate in general in the higher interest rate environment. There hasn’t been the same “hyperscale growth” for real estate ETFs compared to the broader ETF market, Auerbach says. The U.S. real estate ETF market has grown from about $50 billion in 2019 to $70 billion currently. Real estate ETFs also are bumping into stiff competition in a crowded market.

Tackling Goliath

The Vanguard Real Estate Index Fund ETF (VNQ) remains the clear leader in the real estate ETF space with $34 billion in assets, which is a credit to its early launch, strong brand, and established distribution platform. VNQ offers greater liquidity due to its size and also has one of the lowest fees in the real estate ETF space at 13 basis points.

The next six largest players are all household names: BlackRock, State Street, Charles Schwaab, Dimensional, JP Morgan, and Fidelity. Combined, the top six to eight ETFs represent almost 95% of total AUM. “Everyone else is fighting for the last 5%,” Auerbach says.

There’s also a sizable gap between Vanguard and the next largest fund, which is Schwab’s US REIT ETF (SCHH) at nearly $8 billion. “It’s hard to take share from someone that’s already so far ahead,” says Roxanna Islam, head of sector & industry research at TMX VettaFi. Instead, competitors tend to shift to smaller, more niche products, which is evident in recent entrants that have strategies such as options income and covered calls, Islam adds.

For example, SRH Funds launched the SRH REIT Covered Call ETF (SRHR) in 2023. The actively managed ETF targets a portfolio of publicly traded REITs with long-term capital appreciation and annual distribution growth.

Active ETFs

The real estate ETF space has been relatively quiet over the past two years with three new ETFs that launched in 2024 and three to date in 2025. The ETFs that have launched recently are “active” — meaning they don’t track an index — and also tend to focus on niche themes. “There’s not really any plain vanilla index real estate ETFs still being launched,” Islam adds.

The shift to active funds is a common trend in the broader ETF market. According to Morningstar, active ETFs on sale to U.S. investors now outpace passive ETFs, with 2,226 active versus 2,157 passive ETFs as of the end of June. 

The three new real estate ETFs launched so far this year include:

• NEOS Real Estate High Income ETF (ticker: IYRI): This actively managed ETF invests at least 80% in U.S. real estate companies (aligned with the Dow Jones U.S. Real Estate Capped Index) and writes covered calls to generate high monthly income.
• Cohen & Steers Real Estate Active ETF: This ETF focuses on generating income and capital appreciation by investing in real estate companies and REITs globally.
• YieldMax Target 12 Real Estate Option Income ETF (RNTY): This actively managed ETF aims for a 12% target annual income and capital appreciation by investing in real estate companies and REITs, utilizing covered call options strategies.

Although the passive ETFs account for 99% of AUM, active ETFs are starting to gain more momentum over the past year. “We expect their market share gains to accelerate as the REIT asset class continues to perform well post-Fed cycle and the benefits of active relative to index funds become increasingly apparent,” Kuhl says. Among the 45 U.S. real estate ETFs that Janus Henderson tracks, 13 have active strategies. “We think the 13 active real estate ETFs we track represent some healthy differentiation from the passives, and from one another,” he adds.

Expansion and diversification of the REIT universe beyond the core four property types to sectors such as cell towers and data centers are among the factors fueling interest in active ETFs. “Active ETFs are growing in importance in real estate because there’s so much dispersion in performance across property types, and that dispersion in performance makes active management in publicly traded real estate worthwhile,” says Evan Serton, senior vice president, REIT & infrastructure portfolio specialist, at Cohen & Steers.

According to Serton, a key difference in Cohen & Steers Real Estate Active ETF (CSRE) and the firm’s actively managed 40 Act [the Investment Company Act of 1940] mutual funds is that it will have an opportunistic allocation to companies outside of the U.S. The management team plans to take advantage of mispriced opportunities, such as in the Tokyo office market.

“When you own a passive ETF dedicated to real estate, you’re going to own a lot of industrial and a lot of multifamily. We think that there are better opportunities elsewhere,” Serton says. Last year, industrial was the worst performing sector in the REIT market. Despite household formation, multifamily also has seen more pressure on rent growth due to new supply. “Active management, just looking at those two property types alone, can show you where the opportunities exist and where they don’t,” he says.

Focus on Differentiated Strategies

Both active and passive managers are entering the REIT space with offerings aimed at providing investors with alternatives to the longer standing index tracking ETFs. “We see a few different approaches, including dividend yield focus, single property type focus, and active managers who implement ‘best ideas’ approaches with exposure across property types and market caps. They have much more targeted portfolios relative to passives,” Kuhl says.

On the thematic side, early first movers included the likes of Pacer Data & Infrastructure RE (SRVR), Pacer Industrial Real Estate ETF (INDS), and NETLease Corporate Real Estate ETF. Other ETFs have entered the market over the past several years with a focus on sectors such as residential, mortgage, and sustainability.

One of the limitations for sector-specific ETFs is that a manager can run into market cap issues—too few shares to own and potentially too few companies to invest in—which can be further hampered by consolidation. If an ETF drops down to invest in a certain number of companies, they risk going below the 40 Act fund minimum requirement.

Regardless of active or passive structure, investors do need to “look under the hood” to see what’s driving an ETF down the road, Auerbach adds. What makes up this portfolio? Most investors just look at the top 10 holdings, and don’t realize there’s a lot of other holdings that drive the performance. Auerbach also encourages investors to consider both the market cap strategies and a thematic strategy, because it gives investors more exposure to REITs through two different ETF wrappers that complement one another.

Potential for More Growth Ahead

Before and during COVID, real estate ETFs thrived in an environment where interest rates were close to zero. “As rates rose, that kind of pushed REITs out the back door,” Auerbach says. Post-COVID, very few new real estate ETFs have launched. “If interest rates go down and the 10-year Treasury goes down, thus making REIT dividend yields more compelling, we would expect to see a wave of issuance pick up again,” he says.

If that happens, growth would likely be driven in part by mutual fund-to-ETF conversions or mutual funds that are adding an ETF sleeve to an existing fund. “I think you are going to see more of these old school mutual fund guys tiptoeing into the space,” Auerbach says. Fund managers need to embrace the ETF model if they want to survive, or they’re going to get left behind as capital continues to move out of mutual funds. “The hardest part of this equation is figuring out what is the most unique idea that’s going to draw in nine figures of AUM to pay the bills,” he adds.

Experts agree that ETFs are a positive for the REIT industry as it continues to make listed real estate more accessible to retail investors. For many REITs, engaging with ETF management teams is an extension of what they’re already doing. On the passive ETF side and those with index strategies, it’s a matter of understanding what products are attached to those indexes, and where your company does or does not sit within those indexes.

There are a number of different data providers that can help management teams understand who owns them, in which indexes, and which products sit on top of that in the ETF space. “The engagement is more around understanding index management rules, inclusion, exclusion, and when things rebalance so you understand the movement of your stock a little bit better on the passive side,” Abigail McCarthy, senior vice president, investment affairs, at Nareit, says. When there is an active team in place, REIT management teams can engage directly with those active managers, she adds.

What is clear is that ETF structures will continue to capture more capital and play an important role in the investment market. “What’s good for REITs is good for the ETFs and vice versa,” Auerbach says. “It’s a two-way street, and we think it’s important for the ETFs to embrace the REITs and the REITs to embrace the ETFs.”