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What is a REIT Index Fund?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 05 November 2016
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An REIT Index fund is a financial product composed of many REIT funds, where the leadership attempts to make the fund behave like an index of these various funds. REITs are all by definition invested in real estate. The REIT index fund invests different amounts in different REITs to promote the kind of gains and losses that would be associated with a “general real estate index.”

A real estate investment trust, or REIT, is a fund that offers individual investors a chance to put their money into a set of real estate or mortgage acquisitions. The fund offers gains according to the income made from its real estate purchases. Some REITs are like sophisticated property investments, where the fund may be actively focused on rental properties, commercial properties, or other types of real estate. Others might include buying mortgages or mortgage-backed securities.

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As mutual funds and similar kinds of investment products became popular with investors, companies looked at how to offer an extremely diversified real estate fund option. The answer, for many of the top financial brokerages and investor agents, was a multi-REIT fund that used a plurality of individual fund purchases for a specific result. The philosophy is that an index is generally less vulnerable to risk than a single stock or equity. In the real estate market, which can be volatile, choosing an REIT index fund might mean that some of the volatility involved in single REIT funds is mitigated, though experts point out that even an REIT index fund can have relatively high volatility relative to funds in other sectors.

In many ways, REIT index funds look like other types of diversified funds. Investors can find simple information on the web pages of online brokerage companies. One key identifier is the “expense ratio,” which is a cost, relative to yield, that an investor must pay to “stay in the game” with an REIT index fund. There may also be a minimum investment necessary to participate.

Although an REIT index fund is a broader play than a single real estate investment trust, lots of investors like to look at the prospectus of the index fund to figure out the leadership strategies involved in the selected REITs. Each real estate investment trust behaves differently, according to the philosophies of its managers. Some focus on specific kinds of real estate, such as operating rental properties. Others are more broadly set up to invest in mortgages or debt. REITs also pursue acquisitions differently. All of this leads to an enormous amount of choices for an investor who wants to get involved in backing one of these regulated real estate funds.

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