Amid rising U.S. interest rates, rate-sensitive real estate investment trusts (REITs) and the related exchange traded funds are struggling this year. The Vanguard Real Estate ETF (NYSEArca: VNQ), the largest REIT ETF, is down almost 11% year-to-date.
Bold investors willing to bet on a REIT rebound may want to consider international exposure via VNQ’s ex-US counterpart, the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI). VNQI follows the S&P Global ex-U.S. Property Index.
“It also has a durable edge over peers in the form of its lowest-in-class expense ratio,” said Morningstar in a note out Friday. “That said, the fact that its benchmark omits U.S. securities and includes emerging-markets ones make it a misfit in a field dominated by more globally oriented peers. Also, its emerging-markets exposure has translated to significantly higher risk than most funds in the global real estate Morningstar Category.”
VNQI Benefits
ETFs that focus on REITs provide investors exposure and easy accessibility to the real estate sector as opposed to investing directly in real property itself and the potential issues that go with it, including landlord-tenant duties, performing renovations if necessary and property maintenance. With the recent rate hike of the federal funds rate by 25 basis points, investors fretting about the increasing cost to borrow money don’t have to worry about financing with REIT investments.
With VNQI, investors gain exposure to growing segments of international markets through global real estate. For instance, Asia provides opportunity for earnings growth as properties transition to professional real estate management teams.
“The fund also holds a meaningful stake (about 20%) in emerging-markets firms,” according to Morningstar. “Over the long term, emerging-markets real estate firms should benefit from rising incomes and consumer spending, which will drive demand for high-quality spaces, slowly boost rents, and increase occupancy rates. Growth in shopping centers and office space should provide a lift for commercial real estate firms and REITs.”
International REITs may offer diversification benefits as individual property sectors behave differently from one country to another due to different economic and local circumstances. International real estate has generally demonstrated imperfect correlation relative to U.S. real estate over time, which has led to lower volatility and potentially greater risk-adjusted returns.
Morningstar has a Bronze rating on VNQI.
For more information on real estate investment trusts, visit our REITs category.