Like all funds, investment trusts can rise and fall in value. However, they have more factors affecting their performance (such as supply and demand), which can mean they are more volatile and, therefore, a more risky investment.
But while this type of investment can make real estate investing more accessible for the average investor, it also carries some disadvantages. These can include sensitivity to interest rates and limited growth potential, as well as tax consequences and potential legal or ethical challenges.
ETFs often provide more tax advantages since investors only pay capital gains taxes when they sell their shares. Mutual funds offer benefits like professional active management and stronger oversight, though these features usually come with higher costs.
However, as interest rates rocketed and demand for alternative sources of income plummeted, these investment trust sectors seriously sold off, causing share prices to plunge and move to deep discounts to underlying net asset values (NAVs).
Moving an investment asset into a trust can be a strategic step in estate planning and asset protection. Trusts offer various benefits, such as avoiding probate, protecting assets from creditors, and providing control over asset distribution. A trust serves as a valuable tool for estate planning.
Real estate investment trusts (REITs) are an increasingly popular option for many. Real estate can be an important asset class to consider for a broadly diversified portfolio. REITS underperformed the broader market in recent years, though in 2024's second half, they generated better returns.
There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.
Unlike mutual funds, investment trusts can take on gearing, or borrowing additional money for investments, which unit trusts are not allowed to do. That means they can take bigger risks, meaning potentially bigger rewards or potentially bigger losses.
Long-term commitment: Investing in REITs often requires a long-term commitment, particularly for non-traded and private REITs. These investments are not suited for those looking for short-term gains, as they typically require holding periods of several years to realize their full potential.
With a trust, there is no automatic judicial review. While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing.
Real Estate Investment Trusts (REITs)
Essentially, they pool several investors' capital to acquire income-generaing properties, which usually provide steady returns. They're often traded on major stock exchanges and provide a liquid form of investment, making it an easy-in and easy-out investment method.
Investors have a choice over whether their dividends are reinvested or received as income. Income received from dividends paid by an investment trust is usually taxed at the same rate as for other company shareholding distributions.
Decide how you want the funds distributed, such as in a lump sum at a certain date or in specific amounts paid out at regular intervals: monthly, yearly, biennially, etc.
Shutdown risk
There are a lot of ETFs out there that are very popular, and there are a lot that are unloved. Over the last 5 years, an average of 110 ETFs closed per year (Source: Bloomberg). An ETF shutting down is not the end of the world. The fund is liquidated and shareholders are paid in cash.
SPY is more expensive with a Total Expense Ratio (TER) of 0.0945%, versus 0.03% for VOO. SPY is up 28.31% year-to-date (YTD) with +$7.13B in YTD flows. VOO performs better with 28.36% YTD performance, and +$103.99B in YTD flows.
Here are the best low-risk investments in 2025:
High-yield savings accounts. Money market funds. Short-term certificates of deposit. Cash management accounts.
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
As referenced earlier, you can purchase shares in a REIT that's listed on major stock exchanges. You can also buy shares in a REIT mutual fund or exchange-traded fund (ETF). To do so, you must open a brokerage account. Or, if your workplace retirement plan offers REIT investments, you might invest with that option.