If exchange-traded funds (ETFs) are an accurate indication, investors are fond of real estate stocks, including real estate investment trusts. The Vanguard REIT ETF (NYSEARCA:VNQ) is among several funds dedicated to REITs, and in fact, VNQ is the most popular option by a mile.
VNQ currently sports more than $34 billion in assets under management, putting it some $30 billion ahead of its next closest rival, the iShares U.S. Real Estate ETF (NYSEARCA:IYR).
Until last year, real estate stocks were part of the financial services sector in the S&P 500, but are now in their own group. That change has made VNQ the largest sector ETF in the United States.
The Vanguard stable also includes mutual fund versions of the VNQ — namely, the Vanguard REIT Index Fund and its investor shares (VGSIX) and Admiral shares (VGSLX).
A Cost-Effective Way to REIT Exposure
REITs are highly coveted because this asset is required to pay out at least 90 percent of all taxable income as dividends to shareholders. Thus, REITs tend to yield more than other sectors. For its part, VNQ’s trailing 12-month dividend yield is 4.4% — more than double the yield of the S&P 500 and nearly twice what 10-year T-notes dole out.
However, REITs also are sensitive to interest-rate changes. Conventional wisdom asks why be involved with a riskier asset class such as REITs when higher interest rates supposedly make the income potential of bonds more attractive? Still, conventional wisdom can be wrong. Through some of the Federal Reserve’s most recent tightening cycles, REITs have actually proven sturdy.
VNQ tracks the MSCI US REIT Index and holds nearly 160 stocks. It allocates nearly 20% of its weight to retail REITs, including mall operator Simon Property Group Inc (NYSE:SPG). Specialized and residential REITs — self-storage company Public Storage (NYSE:PSA), for example — combine for a third of the ETF’s lineup. Office and healthcare REITs such as Welltower Inc (NYSE:HCN) combine for another quarter.
Another selling point for VNQ is that Vanguard offers low fees on ETFs and even occasionally lowers them as they pack on assets. That’s no guarantee that another fee cut is imminent for the Vanguard REIT ETF, but that’s OK — the fee is already low. The fund charges just 0.12%, or $12 annually on a $10,000 investment, making it cheaper than 90% of rival funds.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.