• Dividends from shares are a source of passive income
• Property is considered as a safe long-term asset class
• Potential safety from diversification can help offset a lower yield

One of my favourite strategies for passive income is to buy dividend-paying shares. However, rather than pick and choose individual stocks, I’ve always been a fan of exchange traded funds (ETFs). These allow me to invest in multiple companies by just holding one share and are usually low cost. There are lots of choices of funds available, but here’s one of my ‘must-have’ passive income ETFs for 2022.

A property ETF

Many investors consider property as one of the safest long-term asset classes. Though I might be wrong, in the turbulent times at present, I think property with its stable income streams and potential for capital appreciation is more important than ever. Although there are various ways to get exposure to property, for my own portfolio a real estate ETF is high on the priority list.

The fund I’ve been looking at is iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This dividend-paying ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index. The index is designed to track the performance of property companies and real estate investment trusts (REITs) listed on the London Stock Exchange.

It’s a decent size, with over £600m in assets, has a relatively low ongoing charge, and has been going since 2007.

The ETF is also well-diversified, holding the 40 firms listed in the index. These operate in a wide variety of sectors including industrial, residential, and healthcare property.

Out of the 40 companies, the largest holding is Segro at just over 20%. This specialises in out-of-town business space and is one of the biggest industrial property companies in Europe. Real estate giants such as Land Securities Group and British Land are also in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group.

A dividend-yield I can work with

One of the main drawbacks to iShares UK Property UCITS ETF GBP DIST is the relatively low dividend of 1.96%. I know that if I carefully pick and choose some companies in the FTSE 100 I might be able to get a better yield, however, for my own portfolio, this passive income is good enough.

This is because the fund is so well diversified. It means that if any individual company or sector has a weak period, it should not mean the game over for the entire ETF. In essence, I’m giving up the chance of a higher return for owning multiple companies through a single share.

In truth, this fund is unlikely to make me rich. However, it promises to give me long-term returns from what I hope is a stable asset class. For that reason, it’s a ‘must-have’ passive income pick for my own portfolio for 2022.

• Buy-to-let property can offer both rental income and capital appreciation
• A real estate ETF can provide access to different sectors of the property market
• Both investments have pros and cons, but there can be room for both assets in a portfolio
  

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Many investors consider property as one of the safest investments over the long term. Investing in property, such as buy-to-let, certainly seems attractive.

Real estate can provide stable revenue flows through rental income as well as the potential for capital appreciation. However, it’s not all plain sailing. Mortgages, maintenance costs, and other expenses can all chip away at the return.

A property ETF 

Another option I’ve been considering is a real estate ETF (exchange-traded fund). ETFs are funds that track an index or sector and can be bought and sold like a share through most online brokers. 

The one I’ve been looking at is iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index. The index is designed to track the performance of real estate companies and real estate investment trusts (REITs) listed on the London Stock Exchange. 

It’s a decent size, with over £600m in assets, has a relatively low ongoing charge, and has been going since 2007. No wonder it’s one of the most popular ETFs for UK investors.

The fund is also well-diversified, holding the 40 companies listed in the index. These operate in a wide variety of sectors including industrial, residential, and healthcare. 

Out of the 40 firms, the largest holding is Segro at just over 20%. This specialises in out-of-town business space and is one of the biggest industrial property companies in Europe. Well-known names such as Land Securities Group and British Land are also in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group. 

The current dividend is 1.96% and perhaps this is the biggest drawback of the fund. UK residential buy-to-let returns currently sit much higher in the region of 5%. Additionally, over 10 years, the average house price has increased by over 40% whereas this ETF has increased by around 10%. Over this period, by my calculations, an investment into bricks and mortar would have been more profitable.

Is buy-to-let better?

Despite this, there are three reasons why I’m still interested. First, UK house prices have had a fantastic price increase over the last 10 years, but there’s no reason to think that this will last forever. Second, there are 40 companies in the fund from a wide variety of property areas. Not only does this offer me more diversification than a buy-to-let, but some of these sectors have very high barrier to entry costs, which can be difficult to overcome as an individual investor. Finally, since I can buy and sell this ETF like a share, it provides access to UK property investment in a liquid way.

On balance, I think there’s room in my portfolio for both buy-to-let property and this ETF. Therefore, I’m going to seriously consider adding iShares UK Property UCITS ETF GBP DIST to my holdings.

Mortgages and other expenses can eat away at the rental return, then there is the hassle that goes with owning a rental property. I don’t want to spend my spare time fixing broken toilets or chasing tenants for payments. Of course, I can outsource this to a managing agent, but it all chips away at the return.

However, there could be another way.

A property ETF

I’ve always been a fan of ETFs (exchange-traded funds) and have recently been thinking about ETFs as an alternative means of property investment. ETFs are funds that track an index or sector and can be bought and sold like a share through most online brokers. A property ETF could provide me with some, if not all, of the benefits of owning property myself without the hassle that goes with it.

In this case, I’ve been looking into iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index, with the index itself designed to track the performance of real estate companies and REITS listed on the London Stock Exchange.

I was drawn to this ETF for its good fundamentals. It’s a decent size with over £600m in assets, it has a relatively low ongoing charge, it has been going since 2007, and pays a dividend (the current dividend yield being 1.96%).

The fund is well-diversified as it holds the 40 companies listed in the index which operate in a wide variety of sectors including industrial, residential, and healthcare.

Out of the 40 companies, the largest holding at just over 20% is Segro. This is one of the largest industrial property companies in Europe and specialises in out-of-town business space. Familiar names such as Land Securities Group and British Land are also included in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group.

Should I invest?

I am not sure.

Although I like the idea of property as an investment, I am already invested in a way. I own and live in a house in the UK and therefore can benefit from appreciation in house prices that way.

Also, I would plan to hold this ETF for a few years and in this case, the five-year return is more important to me. Over the last five years, the ETF has only increased by around 10%. True, it would have been paying a dividend during this time, but compared to other ETFs, this total return is just not that attractive.

For other investors, this ETF might make a lot of sense and indeed, it remains one of the most popular ETFs. It is well-diversified and allows investment in a variety of UK property sectors in a liquid way, but I don’t think this is for me right now and I will keep looking for other opportunities.