It is simple: Vanguard REIT ETF (VNQ) is a bargain at these levels for investors interested in long-term growth and above-average income.
And, if you’re looking for solid long-term growth without a lot of drama, real estate investment trusts (REITs) are a solid choice. VNQ bundles the nation’s top REITs into an exchange traded fund (ETF), so you get excellent exposure to the top REITs in the sector without having to vet each pick. Vanguard’s top-flight manager Gerard C. O’Reilly does it for you at an expense ratio that is one of the lowest of all REIT funds.
There are certainly plenty of other REITs with higher yields, but few will match VNQ’s long-term performance and reliability. In a market like the one we’re in now, finding a way to garner growth and income — without exposing yourself to too much volatility — is the challenge. And VNQ meets this challenge.
While the U.S. dollar has been weakening in recent weeks, it is still so strong that most multinationals are having a hard time keep up their earnings. Sales from outside the U.S. are worth less when converted back to dollars, which affects their bottom lines, and their stock shares then pay the price.
Why VNQ REITs Are Strong
VNQ’s REITs are all in the U.S., so the strength (or weakness) of the dollar has no real effect on its holdings. What’s more, as the economy improves, it becomes easier to raise rents, which increases revenue.
A strong dollar also brings with it its corollary: low interest rates. For property companies, low interest rates means lowe operating costs, better margins (the cost of borrowing versus the lease pricing) and the opportunity to acquire new properties at good prices.
The talk of an interest rate increase certainly took its toll on VNQ’s price through August and into September. But, it’s no surprise the stock has rebounded since then. Even if the Federal Reserve raises rates by the end of the year, it will not have a big effect on the best REITs, as it’s already priced in.
Another economic shift that is more wind in VNQ’s sails is the improving U.S. economy. As the economy strengthens, spending will grow for both businesses and consumers. That means more demand for office space as businesses expand, same store retail sales growth, and higher rents for REITs.
Real estate site Zillow (Z) reports that renters should expect to spend approximately 30% of their income on housing. But, that figure is likely to rise as the economy expands.
Following that trend, VNQ is a great way to play the REITs because it wins on the consumer side as well as the commercial side. Through its holdings, it has exposure to key sectors such as tech and healthcare.
So, if you’re not interested in finding a cloud computing company to buy into, you can still benefit from cloud computing by holding VNQ, since some of its top holdings rent space to server farms that house some of the biggest names in the cloud computing arena.
The same holds true in other sectors as well, making VNQ an interesting way to buy into the best sectors, but without the drama and with a nice dividend.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
