Vanguard, the second-largest issuer of ETFs, confirmed it is changing the underlying index for the popular Vanguard REIT ETF (NYSEArca: VNQ) and the related index funds. VNQ is the largest exchange traded fund dedicated to real estate equities and real estate investment trusts (REITs).
VNQ currently tracks the MSCI US REIT Index, but in July, 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. Last week, Vanguard confirmed shareholders approved the switch.
“Shareholders approved a change to the investment objective for Vanguard REIT Index Fund and Vanguard Variable Insurance Fund-REIT Index Portfolio, which will result in a change in the benchmark to align the funds with the updated Global Industry Classification Standard methodology,” said Vanguard in a statement. “The new 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), offering broader exposure to the real estate market. Shareholders also approved a proposal to reclassify the Vanguard REIT Index Fund from “diversified” to “nondiversified” as defined by securities laws.”
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.