Index investors can’t seem to get enough of real-estate investment trusts: They collectively hold more than 15% of shares outstanding of several of the largest publicly traded property owners in the U.S., a Wall Street Journal analysis found.

Exchange-traded funds specifically held about $61 billion of U.S. and international REITs, according to XTF, led by the $31 billion Vanguard REIT ETF (VNQ). That fund, with an expense ratio of 0.12% and a yield of 3.72%, tracks the MSCI US REIT Index, which includes retail, industrial, hotel, health care, office and other property REITs.

“Real estate adds income to a portfolio and is also a great diversifier,” says Nate Eads,principal at Moller Financial Services. After utilities, the sector has the lowest correlation to the broad S&P 500, according to Morningstar.

While the location of many REIT shares is within ETFs, the optimal location of REIT ETFs is in qualified retirement accounts, such as 401(k)s and IRAs. That’s because REIT distributions are classified as ordinary income, which is taxed at a higher rate than qualified dividends or capital gains. Most nonmortgage REITs also are interest-rate sensitive and have fallen amid expectations for a December rate rise.

REITs aren’t just a U.S. structure. ETFs are available from State Street Global Advisors, Vanguard and BlackRock’s iShares, among others, that track a variety of global indexes.Indeed, the biggest challenge when considering REIT ETFs is selecting which index to follow and what expense ratio to pay, starting at 0.07% for Schwab U.S. REIT ETF (SCHH). There are 36 unleveraged REIT ETFs listed on U.S. exchanges—for a sector that accounts for 3% of the S&P 500. The competition for assets was illustrated last week when BlackRock’s iShares converted an existing ETF to ETF iShares Core U.S. REIT (USRT) and dropped its expense ratio from 0.48% to 0.08%.

[Source:-wall Street Journal]