In today’s investment landscape, investors are constantly seeking opportunities to generate income beyond traditional corporate or government debt. Real estate investment trusts, or REITs, have long attracted the attention of those looking to gain exposure to the real estate market without the challenges of owning property directly. This blog aims to address frequently asked questions about REITs and provide insights into the VanEck Office and Commercial REIT ETF (DESK).
- What are Real Estate Investment Trusts?
- DESK’s Exposure to the REIT Market
- Do REITs Pay Dividends to Investors?
- DESK Dividend Payment Frequency
- DESK’s Distribution of Return of Capital
- DESK’s Fit Within a Portfolio
- How to Buy VanEck ETFs?
What are Real Estate Investment Trusts?
A real estate investment trust, or REIT, is a type of security that invests in real estate or real estate-related assets and typically trades on major market exchanges similar to stocks. REITs provide a way for investors to gain exposure to the real estate sector, benefiting from potential dividends and property appreciation, without the need to directly purchase, manage, or finance properties. There are two primary types of REITs: Equity REITs and Mortgage REITs.
Equity REITs are the most common type of REIT. They own and manage income-producing real estate properties, such as apartment buildings, office buildings, shopping centers, hotels, and warehouses. Income is mainly derived from the rent received from these properties. They might also generate income from the appreciation of properties when they are sold.
Mortgage REITs, or mREITs, generally do not own real estate properties. Instead, they finance real estate, meaning they provide capital to real estate owners and operators either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities (MBS). Their income is generated primarily from the interest on these loans or securities.
What area of the REIT market does DESK provide exposure to?
The VanEck Office and Commercial REIT ETF (DESK) provides concentrated exposure to U.S. office property REITs by seeking to replicate the MarketVector US Listed Office and Commercial REITs Index, which tracks the overall performance of U.S. exchange-listed REITs operating in the office and commercial real estate markets. To be eligible for inclusion in the Index, a REIT must generate at least 50% of its revenues from the office, industrial, or retail real estate sectors.
Office REITs are those real estate investment trusts that specialize in owning and operating office properties. These properties can range from skyscrapers to office parks, allowing individual investors to tap into large-scale office real estate markets without direct property ownership. Other commercial property segments, specifically the industrial and retail segments, are also eligible for inclusion in DESK’s underlying Index. Industrial REITs specialize in owning and managing industrial facilities, such as warehouses, distribution centers, and manufacturing plants. Retail REITs own and manage retail properties like shopping malls, strip centers, and standalone stores.
The rules of the MarketVector US Listed Office and Commercial REITs Index prioritize exposure to office REITs, with exposure to Industrial and Retail REITs limited to a maximum of 20%.
Do REITs pay dividends to investors?
Yes, REITs are specifically designed to provide income. REITs are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends. This structure ensures that a significant portion of the profits generated by REITs, whether from rental incomes in the case of equity REITs or interest incomes for mortgage REITs, is passed on to the investors. This income-generating feature makes REITs especially popular among income-focused investors. However, as with any investment, the level of income or dividend yield varies depending on the REIT’s performance, property occupancy rates, and market conditions.
Learn more about the yield potential of DESK here.
How often does DESK distribute dividends?
The VanEck Office and Commercial REIT ETF (DESK) distributes dividends on a quarterly frequency.
Does DESK distribute return of capital?
Return of capital (ROC) is a payment received from an investment that is not considered taxable income, but instead reduces a shareholder’s cost basis and may be recognized as a capital gain at the final sale of the investment. Real estate investment trusts (REITs) are one type of investment that typically have distributions containing a component of ROC. This is due to special tax treatments for REITs, like depreciation adjustments, that reduce taxable income without reducing the amount of cash available for distribution. Due to DESK’s underlying exposure to REITs, a portion of the fund’s distribution may be considered ROC as the fund distributes all of its net cash received from investments (including ROC) to investors. Investors may receive a “Section 19 notice” accompanying a distribution that estimates the portion of DESK’s current and fiscal year-to-date distribution comprising return of capital. Please view DESK’s Tax Documents and visit VanEck’s Tax Center for more information on the portion of return of capital paid by DESK.
How can DESK fit within a portfolio?
The VanEck Office and Commercial REIT ETF (DESK) provides concentrated exposure to U.S. office REITs and offers investors an efficient way to express a view on this area of the market. DESK can be used by investors tactically to place a short-term targeted bet or strategically as a long-term exposure. DESK can also fit as an allocation within an income portfolio as REITs can offer an attractive source of dividend income.
Originally published 05 October 2023.
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