Home to $34 billion in assets under management at the end of the second quarter, the Vanguard REIT ETF (NYSEArca: VNQ) is the largest exchange traded fund dedicated to real estate equities and real estate investment trusts (REITs). Vanguard, the second-largest U.S. issuer of ETFs, is looking to make some changes to the popular VNQ.
VNQ currently tracks the MSCI US REIT Index, but earlier this month, Pennsylvania-based Vanguard said it is seeking shareholder approval to switch VNQ’s index to the MSCI US Investable Market Real Estate 25/50 Index.
“The proposed benchmark is the MSCI US Investable Market Real Estate 25/50 Index, which includes real estate management and development companies in addition to real estate investment trusts (REITs), thereby offering broader exposure to the real estate market,” according to a statement from Vanguard.
REITs provide diversification benefits as the asset shows a lower correlation to stocks and bonds. However, the asset category has recently experienced heightened volatility due to interest rate risks. Some investors fear REITs will act negatively in rising interest rate environment.
“Vanguard’s goal is to broaden the fund’s mandate and bring it more in sync with other sector funds that use related indices. Hundreds of millions in capital could flow into timber REITs with that change,” reports Amey Stone for Barron’s, citing Capital Innovations Chief Investment Officer Michael Underhill.
Related: A REIT ETF Play With Massive Yield
VNQ currently holds 157 REITs and its top 10 holdings combine for nearly 34% of the ETF’s weight. Retail and specialized REITs combine for over 36% of VNQ’s roster while residential and healthcare REITs combine for nearly 31%.
“Vanguard is also proposing to reclassify the REIT Index Fund from ‘diversified’ to ‘nondiversified’ as defined by securities laws,” according to Vanguard’s statement. “The change will enable the fund to better replicate its target benchmark by holding securities in their appropriate weight. Many of Vanguard’s other equity sector funds are currently classified as nondiversified.”
VNQ is popular with income investors due in part to its low fee. The ETF charges 0.12% per year, or $12 on a $10,000 investment, making it less expensive than 90% of rival funds.
For more information on real estate investment trusts, visit our REITs category.