The real estate sector and the related ETFs are usually viewed as heavily domestic investments, but the real estate sector is massive outside the U.S. and investors can access that opportunity set with ETFs such as the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI).
The Vanguard fund tracks the S&P Global ex-U.S. Property Index. 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.
Like so many other Vanguard ETFs, VNQI is one of the most cost-effective funds in its respective category. The ETF charges just 0.12% per year or $12 on a $10,000 investment.
“It also has a durable edge over peers in the form of its lowest-in-class expense ratio,” said Morningstar in a recent note. “That said, the fact that its benchmark omits U.S. securities and includes emerging-markets ones makes it a misfit in a Morningstar Category dominated by more globally oriented peers. Also, its emerging-markets exposure has translated to significantly higher risk than most funds in the category.”
Other VNQI Perks
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.
“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.”
VNQI yields 3.62%, or more than 50 basis points above its domestic equivalent, the Vanguard Real Estate ETF (NYSEArca: VNQ). Investors should note that VNQI is a dedicated REIT fund.
“Unlike U.S. real estate funds, which are almost entirely composed of REITs, about 53% of this fund’s portfolio is invested in real estate developers and non-REIT property managers,” according to Morningstar. “Developers focus on constructing spaces on new or underutilized land. REITs are restricted from breaking new ground in some countries, but property developers can take on more-speculative projects. Developers are more volatile than REITs because their cash flows are less predictable and their payout ratios generally are lower.”
VNQI garners a Bronze rating from Morningstar.
For more information on real estate investment trusts, visit our REITs category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.