The La Liga giants were drawn against the Bundesliga outfit and last season's runners-up on Friday in what appears a largely favourable draw for Ancelotti's men.
Dortmund have been hit hard by injuries this season and find themselves 23 points behind leaders Bayern Munich in the league.
But Ancelotti is still wary of Jurgen Klopp's side and said he expected the quarter-final ties to be open.
"They are a good team and have a lot of experience in this competition," he told a news conference.
"Last year they reached the final. I think this time around the quarter-finals will be very open affairs.
"The best sides have reached this stage. We are full of hope and expectation in this tournament and know we will have to play well against what is a very competitive side.
"I think that, as they are out of contention in the Bundesliga, in the Champions League they will be highly motivated to do well.
"They are a top-quality, well-organised team, above all at the back. They are also strong on the counter-attack.
"In order to win we will need courage and personality."
Real are aiming for a record-breaking 10th Champions League title, with their last win coming in 2002.
‘He instantly popped into our ratings as one of the best U21 midfielders in Europe. The impressive thing is Slot has made him into more of a no.6' Inside Ryan Gravenberch's transformation at Liverpool
‘I don’t think Liverpool would look at Ollie Watkins, a striker isn’t a pressing issue for them – it’s Arsenal who need one’ Former Reds star explains why his old club don’t need an out-and-out forward this summer
