Home to $33.5 billion in assets under management at the end of May, the Vanguard REIT ETF (VNQ) is the largest U.S. sector exchange traded fund and it is inexpensive. VNQ’s annual fee of just 0.12%, or $12 on a $10,000 investment, confirms as much.
VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of a benchmark index that measures the performance of publicly traded equity REITs and other real estate-related investments. VNQ invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property.
Following a February 2018 index change, VNQ’s goal is to closely track the return of the MSCI US Investable Market Real Estate 25/50 Index.
“The index change came in response to recent changes to MSCI and S&P Dow Jones’ Global Industry Classification System, or GICS, which carved out real estate as a stand-alone sector for the first time,” said Morningstar in a recent note.
REITs are comprised of companies that own office towers, hotels, shopping malls and other commercial properties, offering investors exposure to the domestic economy and away from the uncertainty associated with the global supply chain, the Wall Street Journal reports.
A Closer Look at VNQ ETF
VNQ is home to 190 stocks from a dozen real estate industries, but the fund allocates nearly 63% of its weight to specialized, retail and residential REITs.
“Since the global financial crisis, REITs have benefited from two important dynamics,” said Morningstar. “Interest rates have remained low, and, with slow and steady growth in the broader economy, developers have not roared back with a massive influx of new supply in the marketplace. As a result, incremental demand from a slowly improving economy has accrued to existing landlords in the form of higher occupancies, higher rental rates, and solid same-store net operating income growth.”
Real estate investors also enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities.
VNQ, which is up 16.80% this year, has a dividend yield of 4.11%. Morningstar has a silver rating on the fund.
For more information on the real estate investment trusts segment, visit our REITs category.