Investors who want to hold real estate securities may choose a broad-based fund that closely tracks a major index. Those are the least expensive vehicles in this asset class. For example, the exchange-traded VIPER shares of Vanguard REIT Index Fund have an expense ratio of only 0.12 percent per year.
What’s more, index funds may deliver high yields because of their low costs. Morningstar, the mutual fund researcher, puts the average yield from real estate mutual funds at 3.9 percent, and some index funds have even higher yields.
For your real estate allocation, your first choice would be to hold such funds inside a tax-deferred account because they throw off relatively large amounts of taxable income each year. Most dividends from real estate investment trusts (REITs) do not qualify for the favorable 15 percent tax rate so those payouts would be taxed as much as 35 percent, outside of a retirement plan. Therefore, considerable shelter is possible if you hold REITs and REIT funds in a tax-deferred plan.