Should you buy individual REITs or a REIT ETF?

This post was created in partnership with CSOP Asset Management Pte. Ltd. All views and opinions expressed in this article are Beansprout's objective and professional opinions.

What happened?

With interest rates and T-bill yields coming down in Singapore, I’ve found myself, like many other income-focused investors, taking a fresh look at Singapore REITs (S-REITs).

From what I’ve seen, REITs tend to perform better when interest rates are falling. 

They typically provide better yields than government bonds.

They also stand to benefit from lower borrowing costs and higher property valuations.

But should I be investing in individual REITs, or would a REIT ETF make more sense?

In this post, I’ll break down the pros and cons of individual REITs and REIT ETFs such as the CSOP iEdge S-REIT Leaders Index, and share how I’m thinking about navigating the REIT market right now.

What are REITs and REIT ETFs?

REITs, or Real Estate Investment Trusts, are companies that own and manage income-generating properties like shopping malls, offices, or warehouses. 

When you invest in a REIT, you’re buying shares in one company and its specific portfolio of properties, managed by a single team.

REIT ETFs, on the other hand, are funds that invest in a collection of different REITs. 

Instead of putting your money into just one company, you’re spreading it across many, giving you instant diversification across various property types and managers.

An easy way to think about it: investing in an individual REIT is like buying one house, while investing in a REIT ETF is like owning a small slice of an entire neighbourhood.

Understanding a REIT ETF through the CSOP iEdge S-REIT Leaders Index ETF

Let me walk you through a real-life example to show how a REIT ETF works using the CSOP iEdge S-REIT Leaders Index ETF. 

The CSOP iEdge S-REIT Leaders Index ETF was launched in November 2021, and it offers investors easy access to a wide range of Singapore REITs.

The ETF is managed by CSOP Asset Management, a company with experience building similar investment products across Asia.

Unlike a single REIT that usually focuses on just one type of property, such as offices or shopping malls, the CSOP iEdge S-REIT Leaders Index ETF includes around 30 different REITs listed in Singapore. 

This means your investment is spread across many different property types and companies. 

It’s a straightforward option if you don’t want to pick and manage individual REITs yourself.

The ETF follows a list of the most actively traded and larger REITs in Singapore, so you're getting exposure to some of the most established names in the market.

Why a REIT ETF may be preferred over a REIT

#1 – Diversification

One of the biggest differences I’ve noticed between investing in a REIT ETF and picking individual REITs is diversification.

When I invest in a REIT ETF, I’m automatically spreading my money across various property types and geographic locations. 

That means if one sector, say retail, isn’t doing well, the rest of the portfolio can help cushion the blow. 

This kind of diversification matters because different property sectors perform differently depending on the economic environment. 

On the other hand, going with individual REITs means I'm making a more concentrated investment. 

This can pay off if the sector I’ve chosen does well, but it also comes with higher risk if things don’t pan out.

REIT ETFs also spread risk across different management teams. 

If one REIT’s manager makes a poor decision, it affects a small portion of my overall investment.

Take the CSOP iEdge S-REIT Leaders Index ETF as an example. 

With a single investment, I get exposure to:

• A wide range of property types from retail malls and offices to industrial spaces, data centres, hotels, and even healthcare facilities.
• Global real estate holdings. Even though the REITs are listed in Singapore, they own properties across Asia-Pacific, North America, and Europe.

That said, it’s also worth keeping in mind that some macro factors, like rising or falling interest rates, tend to affect the entire REIT market. 

So while diversification helps manage risk, it doesn’t eliminate it entirely.

#2 - Income stability

Another thing I’ve been thinking about is income reliability, especially since I know income investors, myself included, count on dividends as a regular source of income.

From what I’ve seen, REIT ETFs tend to offer more stable payouts. 

That’s because they pool income from a broad mix of properties and sectors, which helps smooth out any fluctuation in payouts. 

It’s like having multiple income streams, if one slows down, others are still providing me with income.

In contrast, individual REITs might offer higher yields, but the dividends can fluctuate more depending on how their specific properties are doing. 

If a major tenant leaves or a property underperforms, the impact on income can be more noticeable.

Here’s how I think about the difference in how they generate income:

• With individual S-REITs, the dividends I receive come directly from rents collected from their properties. These are usually paid out quarterly. The yield can vary quite a bit depending on the type of property, where it’s located, and the quality of the tenants.
• With the CSOP iEdge S-REIT Leaders Index ETF, the fund collects dividends from all the REITs in the index and passes them on to me twice a year. The final yield is a weighted average of all the underlying REITs’ yields, after deducting the annual management fee and other expenses. 

While I probably won’t get the same high yield I might with a top-performing individual REIT, I’m also shielded from the underperformance of weaker REITs.

What I end up with is a more balanced yield, and more importantly, reduced risk from any single property or tenant.

That trade-off can be worth it for the stability it brings, especially if I’m looking to build a dependable income stream.

#3 – Hand-off approach

When I invest in individual REITs, I have full control over where my money goes. 

I can choose specific sectors, assess the quality of management teams, and dig into property details and tenant profiles. 

It’s a more hands-on approach that lets me build a portfolio I personally believe in.

With REIT ETFs like the CSOP iEdge S-REIT Leaders Index ETF, I give up some of that control in exchange for convenience. 

The fund follows a set index, so I don’t get to pick the individual REITs but I also don’t need to track every financial report or rebalance my portfolio. 

It saves time because its a passive option that still gives me diversified exposure to the REIT market.

Ultimately, it comes down to how involved I want to be.

If I’m willing to do the research, individual REITs let me build a more customised portfolio. But if I prefer a simpler way to invest, a REIT ETF is a practical and efficient choice.

#4 - Ease of buying and selling

Finally, I’ve also been thinking about liquidity, which is basically how quickly I can access my cash.

Some individual REITs, especially the smaller or less well-known ones, can have lower trading volumes. 

I’ve found that this sometimes leads to wider bid-ask spreads, which makes it harder to buy or sell without impacting the price, especially if I’m trying to move a larger amount.

Comparison of REIT ETFs and individual REITs

What would Beansprout do?

Over the years, I’ve explored both individual REITs and REIT ETFs, and I’ve found that each has its place depending on what I’m looking for.

While investing in individual REITs gives me the flexibility to choose specific sectors or management teams, it also requires time and effort to stay on top of market developments and company performance.

On the other hand, a REIT ETF like the CSOP iEdge S-REIT Leaders Index ETF offers a more diversified and hands-off approach. 

It provides exposure across different sectors and regions, helping to smooth out sector-specific risks and making it easier to stay invested without needing to manage each position closely.

Of course, no option is perfect. Individual REITs may offer higher yields, but with greater variability. REIT ETFs tend to offer more stability, though returns are generally more moderate after fees.

Ultimately, the right choice comes down to how much time you’re willing to commit and how involved you want to be in managing your investments. 

If you prefer a simpler, diversified way to access the REIT market, a REIT ETF could be worth considering.

Learn more about the CSOP iEdge S-REIT Leaders Index ETF here. 

Disclaimer:

The investment product, as mentioned in this document, is registered under section 286 of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”). This material and the information contained in this material shall not be regarded as an offer or solicitation of business in any jurisdiction to any person to whom it is unlawful to offer or solicit business in such jurisdictions.  

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