Smart real estate investing: understanding ETFs and listed funds to diversify your assets

The investment real estate is rightly considered a pillar of wealth creation. Today, real estate ETFs and listed funds offer a modern and accessible alternative to gain exposure to this traditional sector. This article explores in detail how these financial instruments can simplify your real estate investment strategy.

Introduction to Real Estate ETFs and Listed Funds: Basic Principles

THE ETFs and listed real estate funds offer direct exposure to the performance of real estate indices, portfolios of listed real estate companies or groups of real estate assets. These financial instruments allow investors to participate in the real estate market without requiring the direct acquisition of these properties. They are traded in real time on stock markets, like shares. Their value fluctuates according to the evolution of the underlying assets they represent. The latter can be widely diversified or concentrated geographically and sectorally.

The advantages of investing through real estate ETFs and listed funds

Accessibility is one of the main strengths of real estate ETFs and funds, allowing investors to start with relatively small amounts compared to direct real estate investing. A single instrument can provide access to a wide range of real estate assets across different geographies and sectors. This is a huge diversification advantage compared to direct real estate investing, which is typically focused on a single asset.

Real estate, by definition, is an asset that cannot be moved. Unlike securities, it is difficult, if not impossible, to sell quickly and easily. This is where real estate ETFs and exchange-traded funds come in, mitigating this constraint by offering one of their main advantages: liquidity.

Types of ETFs and real estate listed funds available on the market

It is important to understand the differences between listed real estate funds and ETFs that are composed of real estate companies. It is also important to distinguish between ETFs and funds that specialize in specific segments, such as residential or commercial real estate, and those that target specific real estate markets, whether national, regional or international. Let's look at these different categories, before providing some concrete examples.

Listed real estate funds

Listed real estate funds own, operate or finance income-generating real estate. They provide access to diversified real estate portfolios without having to purchase properties directly. They are generally less volatile than the stock market as a whole.

ETFs composed of real estate companies

For their part, ETFs composed of real estate companies reflect a basket of securities that include shares of companies operating in the real estate sector. These ETFs are directly impacted by the results of the companies that compose them. This explains why they generally present a volatility higher than listed real estate funds.

Residential & commercial real estate ETFs and listed funds

ETFs and listed real estate funds are characterised by a variable allocation between residential and commercial properties. Although many of them combine both categories, some are dedicated to residential assets, while a minority focus on the commercial sector.

Residential real estate

In general, residential ETFs and funds offer more stable and predictable returns. Indeed, the demand for housing remains relatively constant, even during economic downturns, due to the need for housing. This segment of the market is therefore less susceptible to significant fluctuations. As part of a diversified portfolio, residential real estate proves to be a particularly attractive option. Indeed, its low correlation with economic activity, and therefore with stock markets, gives it appreciable stability.

Commercial real estate

ETFs and commercial funds, encompass properties such as offices, retail stores and warehouses. Their performance is often correlated with the overall health of the economy. In boom times, they can benefit from rising rents and strong demand for space, leading to higher returns. Conversely, in a recession, these assets can experience significant declines in value, increasing the volatility and risk associated with this type of investment.

“Geographic” real estate ETFs and listed funds

Swiss, European and US real estate ETFs and funds have distinct return and risk characteristics, influenced by market dynamics, regulations and economic conditions specific to each region.

Swiss real estate

Swiss real estate is based on a stable political situation, a solid legal framework, efficient land management and a strong demand for quality real estate. Swiss cities, such as Zurich, Geneva and Basel, are courted by both local and international investors. This attractiveness is largely due to a robust Swiss economy, supported by diversified sectors such as finance, high technology and the pharmaceutical industry.

In addition, the strength of the Swiss franc provides stability that attracts many foreign investors, thus reinforcing the attractiveness of the market. Low interest rates also promote access to borrowing and support the continued growth of residential and commercial real estate. As a result, demand remains robust, fueled by economic growth and significant immigration, which contributes to the increase in the population and, consequently, to the increase in housing needs.

By integrating exposure to Swiss real estate, investors benefit from a sector that is both dynamic and resilient, in a stable economic framework. This is directly reflected in the results of Swiss real estate ETFs and funds, which display relatively constant returns, associated with measured volatility.

European real estate

European real estate has very different characteristics from those observed in the Swiss real estate market. It has large disparities between countries and even within the same country. These variations can be attributed to many factors, including economic policies and changing demographic conditions.

Another major distinction compared to Switzerland is that the instruments tradable on European stock exchanges are mainly composed of ETFs, which are based on companies operating in the real estate sector, which are themselves often listed on the markets. As a result, these instruments are generally more volatile than their Swiss counterparts. Although there are real estate funds, such as SCPIs in France, these are not listed on the stock exchange.

American Real Estate

US real estate ETFs are characterized by high returns, but with fairly high volatility. In Uncle Sam, the land market is large and diversified, offering many opportunities at the residential, commercial and industrial levels. However, sensitivity to economic cycles is marked. US real estate ETFs can therefore undergo strong variations when economic conditions change.

A particularly striking example of this volatility occurred during the subprime mortgage crisis in 2008. At that time, the fall in real estate prices had a dramatic impact on the entire sector. Real estate ETFs, which were largely exposed to mortgage-backed assets, suffered significant losses. The market collapse led to an increase in mortgage defaults, which precipitated a fall in the value of property-related securities. Some investors panicked, leading to massive sales and further lower prices.

Despite this brutal shock, the market has shown signs of long-term resilience. After a prolonged period of decline, US real estate ETFs have gradually started to recover, supported by the economic recovery and improving credit conditions.

Examples of ETFs and listed real estate funds

There are a multitude of ETFs and listed real estate funds, which can quickly make the choice confusing. I will cite a few examples that, in my opinion, illustrate the diversity of the market. We will briefly discuss their performances and the associated risks, before analyzing them in more depth in the section dedicated to backtests.

In Switzerland

On the Swiss stock exchange, there are two relatively well-known ETFs that perform quite similarly, although they have different designs. Each represents a Swiss real estate index: SXI Real Estate (SRECHA) and SXI Real Estate Funds (SRFCHA).

SRECHA mainly consists of shares of real estate companies such as Swiss Prime Site, PSP Swiss Property, Allreal, Mobimo, Intershop, Zug Estates, Warteck and SF Urban Properties. SRECHA is therefore a fairly classic choice for an ETF. Despite this exposure to real estate stocks, SRECHA stands out for its relatively low volatility compared to the market.

SRFCHA, is primarily comprised of exchange-traded real estate funds, making it a fund of funds. Logically, this type of structure implies lower volatility than SRECHA. However, what may be surprising is that SRFCHA also displays slightly better performance. One might have assumed that the management fees associated with the ETF as well as its underlying funds would harm its profitability.

Among the funds that make up SRFCHA is UBS's SIMA, which is invested for around 50% in residential buildings and 50% in commercial buildings (offices and commercial buildings) located mainly in German-speaking Switzerland. It is the largest real estate fund in Switzerland. It is also listed on the Swiss stock exchange. Among the other funds in SRFCHA is another listed fund from UBS, ANFO, which is invested mainly in residential real estate in German-speaking Switzerland.

The graph below shows that SRECHA (yellow), SRFCHA (green), ANFO (red) and SIMA (blue) have broadly similar trajectories. Since 2023, SIMA has taken the lead, while previously SRFCHA was dominant. ANFO, on the other hand, is just behind, while SRECHA is currently in last place.

It should be noted that the performance mentioned above only takes into account the capital gain linked to price changes (price return). Dividends are not included in this calculation. We will discuss this point in more detail later.

There is also an ETF, also at UBS, dedicated exclusively to Swiss commercial real estate: "Swissreal" (SREA). However, its performance leaves something to be desired because it is significantly behind its benchmark index (SRCHA).

I have presented here only a limited selection of instruments available in Switzerland. When it comes to ETFs, the country generally offers less variety compared to destinations such as Ireland or the United States. However, when it comes to real estate listed funds, Switzerland has a considerable choice of quality tools.

We have the option of taking an approach focused on investing in real estate stocks, as illustrated by the SRECHA ETF, or focusing on real estate investment funds. Personally, I prefer the second option, which has a slightly more favorable risk/return ratio. By choosing this approach, we can select from a multitude of funds, such as ANFO or SIMA, or invest directly in the SRFCHA ETF, which groups together all of these instruments. The determining portfolio, which you can consult in the members area, includes several other listed funds that I have not covered here.

I have always maintained that SRFCHA is a must-have choice for any new investor, even before exploring stocks. This ETF allows you to get acquainted with how the stock market works, by presenting a volatility adapted to beginners. In addition, it allows you to acquire a diversified portfolio, although focused on a single asset class, while remaining relatively affordable in terms of financial investment. In my opinion, it is one of the simplest and most accessible portfolios, while presenting a moderate risk and an interesting return.

In a more complex portfolio, it is possible to go beyond the single choice of SRFCHA by selecting some of its components to optimize the overall results. We will discuss some retrospective analyses on this topic later.

In Europe

An easy way to enter the European real estate market is to invest in the IPRP ETF offered by iShares. Although the long-term profitability is satisfactory, it should be noted that its volatility is particularly high. This is explained by the fact that this ETF mainly relies on listed real estate companies such as Vonovia, Covivio, Klepierre, Castellum, Icade and Argan, among others.

IPRP also includes Swiss companies, such as those in SRECHA. This means that it is possible to gain exposure to all of these markets with a single instrument, which is convenient. Therefore, combining these two ETFs in a portfolio does not really provide added value in terms of diversification. On the other hand, this mix can be relevant to overweight Swiss real estate, which helps to reduce volatility and optimize the risk/return ratio.

European real estate has suffered from the rise in prices caused by the Wuhan virus and the rate hikes that followed. In Switzerland, thanks to the strong franc, this phenomenon has been much less marked. The graph below clearly shows the difference in volatility and the impact of the rate hike on IPRP (in blue) compared to its Swiss counterpart, SRECHA (in orange). Over the last fourteen years, the latter has beaten IPRP in terms of both profitability and risk. This is all the more true since the euro (in black below) has melted against the Swiss franc during the same period.

In the USA

In the United States, there is, as one might expect, a wide range of real estate ETFs. VNQ, offered by Vanguard, is undoubtedly the most renowned and liquid in this category. This ETF includes publicly traded real estate companies, both in the residential and commercial sectors. Over the long term, VNQ shows attractive profitability, but its volatility remains high. The latter was particularly accentuated during the subprime crisis in 2008.

Looking at the last two decades, despite a significant catch-up since this event, VNQ's performance (shown in blue below) fails to compete with that of Swiss real estate (represented by SIMA in orange below), which displays significantly less volatility. This is especially true given that the dollar (shown in yellow below) has melted against the CHF during the same period.

Among the components of VNQ is the company "Realty Income" (ticker: O), which deserves a little aside. The company is one of the few REITs that pays monthly dividends, like rents. It has registered a trademark for the phrase "The Monthly Dividend Company." Realty Income was founded in 1969 and is active in commercial real estate, particularly in chain stores, drugstores and fast food restaurants, in the US, the UK, France, Spain, Portugal, Italy, Ireland and Germany.

The focus on defensive sectors allowed "O" (in red below) to get through the 2008 crisis much more serenely than its American counterparts (see VNQ in blue). Realty Income also beats SIMA, even if we take into account the fall of the dollar. Beware of shortcuts, however: "O" is a listed real estate company, while SIMA is a investment funds listed real estate. The risks are not comparable.

Other US real estate ETFs include REZ, offered by iShares. Although its quote suggests that it is residential, less than half of its capitalization is devoted to it. The ETF aims to replicate an index composed of US real estate stocks in the residential, healthcare and self-storage sectors. This is oriented towards the defensive side of this sector. Between 2010 and 2024, REZ (in blue below) has posted a much more sustained performance than VNQ.

Overall

For those looking to gain exposure to the global real estate market, the REET ETF offered by iShares is an option to consider. However, the diversification offered by this instrument is not optimal. Indeed, the US component of the ETF represents a preponderant share (75%) and focuses almost exclusively on the commercial sector (80%). Between 2014 and 2024, REET (shown in blue below) has performed significantly worse than VNQ (shown in orange).

Industrial real estate

Manufacturing and logistics companies are showing a growing trend to outsource their real estate costs. This includes light production facilities, warehouses and distribution centres. This dynamic benefits companies specialising in industrial real estate, which offer their properties for rent through long-term contracts. In some countries, such as the USA or the UK, these are of the triple net type: the tenant agrees to pay not only the basic rent, but also maintenance costs and other costs related to renting the premises.

Advantages of industrial real estate

The rise of online sales is driving a greater need for warehouse space. At the same time, supply chain disruptions are forcing many manufacturing companies to lease more space to handle additional inventory. Additionally, many companies are choosing to relocate production in response to supply chain challenges and growing barriers to international trade.

These various phenomena have been amplified by the chinese virus, which has significantly boosted the revenues of companies operating in industrial real estate. These companies also tend to generate more stable cash flows than other players in commercial real estate, due to their long-term triple-net leases and low operating costs.

Risks related to industrial real estate

The main risk in industrial real estate is overcapacity. In order to respond quickly to demand, companies operating in this area anticipate the construction and acquisition of new capacities, without having signed a lease, which can, in the event of an insufficient level of occupancy, have a significant impact on revenues.

As with other real estate businesses, those active in the industrial sector are also sensitive to changes in interest rates. Their rise can increase expenses and make financing future developments more difficult.

Prologis

Prologis (PLD) is a global industrial real estate giant. The Californian company is also the largest capitalization in the VNQ ETF. It has more than 6,700 clients, spread across 19 countries, on a dizzying total surface area of 111.5 square kilometers, or nearly 16,000 football stadiums.

STAG Industrial

STAG Industrial (STAG), another American company, has a diversified portfolio of industrial real estate (warehouses, light industrial, flex space, and offices). Its tenants are spread across multiple markets and industries. STAG has nearly 600 buildings, spread over 10.6 square kilometers, or nearly 1,500 soccer stadiums. Like Realty Income (O) discussed above, STAG is one of the few real estate companies that pays a monthly dividend.

ARGAN

Argan (ARG) is a French real estate company specializing in the development and rental of logistics platforms. It has around a hundred of them, spread over 3.6 square kilometers, or more than 500 football stadiums.

The three companies mentioned above have recorded remarkable performances between 2011 and 2024, mainly driven by the rise of e-commerce, sourcing challenges and reshoring trends. As we see below, the Wuhan pandemic served as a catalyst for a momentum that was already well underway. However, the inflation that followed, as well as the reactions of central banks through interest rate increases, significantly slowed this evolution. Despite these obstacles, over the period analyzed, PLD (in dark blue), STAG (in purple) and ARG (in light blue) significantly outperformed VNQ. Argan posted the best performance, despite a depreciation of almost 30% of the euro during the same period.

Performance and risk analysis

The performance of real estate investments is influenced by several factors, including interest rates, inflation and economic cycles. The correlation with the stock market is one of the biggest drawbacks of real estate, as it limits the diversification benefits during major financial crises. The volatility of this asset class can even be significant during these periods. Among all the instruments we have looked at, only Swiss listed real estate funds seem to be partially spared by these phenomena.

To evaluate an ETF, fund or listed company, it is essential to focus not only on its performance, but also on its risks, in particular its volatility and its correlation with the stock market. In the following table, we list the instruments we have reviewed, specifying their profitability and risk indicators, which will facilitate our choice for building diversified portfolios. Performance is given in Swiss francs, including dividends (Total Return). For the sake of simplification, I have focused on the most representative ETFs, funds and stocks:

• For Switzerland, I kept only the two ETFs that cover other listed funds (SRFCHA) and real estate stocks (SRECHA). The ratios of the other funds are quite similar to SRFCHA. Some are a little better (see my wallet), others a little less good, but the general trend remains the same.
• I removed IPRP (Europe), which shows a catastrophic performance associated with high volatility.
• I also removed REET (global real estate) whose results were disappointing and which has a slightly shorter history than the others.

Findings:

• SRFCHA and SRECHA, as already noted above, are neck and neck. SRFCHA has a very slight advantage in terms of profitability, Sharpe ratio and maximum loss, but this remains quite marginal. The two ETFs are perfectly substitutable.
• Swiss real estate is clearly the least risky, both in terms of maximum loss, volatility, correlation with the stock market (S&P 500) and beta. Despite a slightly lower CAGR than the other instruments, it thus displays a very good Sharpe ratio.
• In the US, REZ performs better overall than VNQ, with a higher CAGR and Sharpe ratio, associated with a lower correlation with the market, as well as a lower beta.
• The stocks of the commercial real estate companies we have covered are, unsurprisingly, very volatile, with maximum drawdowns that can be significant. They compensate for this by having a rather low correlation with the market, which can make them interesting stocks to build a portfolio.

Portfolio Integration Strategies

As mentioned above, Swiss real estate, via an ETF like SRFCHA, can be a very interesting choice for someone who is taking their first steps in the world of investment. It is one of the most basic portfolios possible, while remaining relatively low risk and profitable. Few investments return more than 5% in CHF per year on average, with a volatility of only 8%.

Of course, real estate can also be useful in a portfolio that includes other assets. We saw above that Swiss listed real estate funds are poorly correlated to the S&P 500. This is even the case for some American shares of companies active in commercial real estate. This means that they are likely to provide interesting diversification within a portfolio that includes shares, by optimizing its return/risk ratio. In this article, we will limit ourselves to these two assets (real estate and shares). In the following posts, we will extend the choice to other asset classes.

It is generally recommended to allocate between 5% and 15% of a portfolio to real estate ETFs. In reality, it is not that simple because it depends greatly on the assets used. Below we will test what this gives, with various weightings and various instruments, for both stocks and real estate. The portfolios were backtested by rebalancing them once a year to match the target allocation.

Swiss portfolio (shares + real estate)

A 100 % real estate allocation in Switzerland has a better Sharpe ratio compared to an investment exclusively focused on equities. With equivalent risk, it is therefore preferable to invest in real estate in the land of William Tell rather than in listed companies. This confirms SRFCHA as a preferred instrument within the framework of a strategy based on a single ETF. However, the combination of the two asset classes proves to be an even more advantageous option.

The "sweet spot" in terms of return/risk is close to parity, with a distribution of 45 % of stocks and 55 % of real estate. This approach therefore deviates significantly from the usual advice, which recommends an allocation of between 5 % and 15 % for real estate values. There is therefore a Swiss sonderfall around real estate, which can be explained by the reasons already mentioned throughout this article.

US portfolio (stocks + real estate)

Things look very different on the other side of the Atlantic. Equities are performing significantly better than real estate, with a considerably higher Sharpe ratio. Furthermore, the combination of these two asset classes does not generate any capital gains, due to their relatively high correlation. This phenomenon is also observable with REZ, which is nevertheless less linked to the market than VNQ.

With a 15 % allocation to real estate, the portfolio has a Sharpe ratio equal to that of a strategy based solely on the SPY, but with lower profitability. It should be noted that the period studied does not include the subprime crisis; therefore, the results would have been even less favorable.

A portfolio composed solely of the SPY ETF therefore proves to be more efficient. This observation also applies to the various allocations tested for Switzerland, and this in a significant manner.

US stocks and Swiss real estate

Where things get particularly interesting is when we combine US equities with Swiss real estate. While we do have to sacrifice some profitability, this allows us to significantly reduce the volatility of the portfolio, which translates into a much better Sharpe ratio. The optimal allocation in terms of return and risk is therefore around 60 % US equities and 40 % Swiss real estate.

Swiss stocks and American real estate

Out of curiosity, I decided to explore the results of an opposite approach, mixing Swiss stocks and US real estate. At first glance, one might expect disappointing results due to the limited profitability of EWL and the relatively high volatility of REZ. However, the combination of the two assets offers a better Sharpe ratio than either ETF individually (see above).

The sweet spot is 60 % of Swiss stocks and 40 % of US real estate. However, we find that the performance remains significantly lower than that of the previous strategy. The results are certainly interesting, but not necessarily useful.

More complex portfolios

Rather than focusing on all of Swiss real estate, we can focus on a few of the funds that make it up (in the table below: "immo CH"). This is what I am now doing with the determining portfolio. This allows the CAGR and the Sharpe ratio to rise somewhat. In the same vein, we can distribute SPY across three ETFs (QQQ+VDC+XLV), according to a strategy already mentioned in our last post. Here too we still gain a few tenths on our indicators. We end up with a nice profitability (11.23%/year on average), accompanied by a very good Sharpe ratio (1.15). The portfolio in the penultimate line is also worth a look, showing excellent results, with only four ETFs.

We can follow the same approach by focusing on international commercial real estate, via O, STAG, PLD and ARG, in addition to SPY. The results are very good from a CAGR perspective, but less so from a Sharpe ratio perspective. Even by breaking down SPY into three ETFs and adding a share of Swiss real estate, we cannot obtain a Sharpe ratio as good as the 1.15 mentioned in the previous paragraph. Moreover, as is often said, past performance is no guarantee for the future. This is even more true when we look at individual stocks, as here with PLD, O, STAG and ARG.

Conclusion

Real estate ETFs and listed funds represent a simple and effective solution for investors wishing to gain exposure to this sector. They bring flexibility and liquidity to an asset class that is sorely lacking in it. Their integration into a diversified portfolio helps to optimize its risk-return ratio. This is particularly the case with Swiss real estate, via an ETF such as SRFCHA for example. Combined with the US stock market, it allows you to obtain a portfolio that is both profitable and relatively low risk.

This is a huge asset for anyone aspiring to or already having achieved financial independence. A portfolio that is both high-performing and low-volatility means a high Sharpe ratio and a higher risk-free withdrawal rate.

Another undeniable advantage of real estate, which arises directly from this observation, lies in the investment period, which is generally shorter than that of shares. While for the latter, it is recommended to respect an investment horizon of at least ten years, ideally twenty years, for real estate, particularly Swiss, these figures are reduced by half.

In our next article, we will look at another widely known asset class: bonds. We will examine what they are and the various forms that exist. We will particularly focus on their interaction with stocks, notably through one of the most famous portfolios: the 60/40 model. We will question its reputation and assess whether it truly justifies this notoriety. To do this, we will explore different weightings using several stock indices as well as a variety of bond ETFs.