Real estate has long been a popular asset class as it tends to offer excellent long-term returns with relatively low correlation to equities and can also serve as a viable hedge against inflation.One of the best things about the expansion of the ETF universe is the extent to which it has spawned numerous vehicles for investors to easily and cost-effectively gain exposure to otherwise out-of-reach areas of the market like real estate.As the largest fund in the space, and one that holds a sizable portfolio of U.S.-focused REITs, the Vanguard REIT ETF warrants a closer look from anyone looking to add real estate exposure to their portfolio .

In A Nutshell

VNQ's formal name is a pretty clear reflection of what this ETF is about - it seeks to replicate the MSCI US REIT Index. The MSCI US REIT Index is a comprehensive index comprised of U.S. equity REITS, as it represents about 85% of the present U.S. REIT universe. Investability is an important consideration with this index, and MSCI uses its "free float" methodology to reflect the availability of shares for U.S. investors.

This behemoth of a fund has accumulated upwards of $14 billion in assets under management since launching in September of 2004.

What Makes VNQ Unique

The sheer size of VNQ is perhaps the most immediately noteworthy characteristic of this fund - at $14 billion in AUM, VNQ is more than three times larger than the next-largest real estate ETF. Despite that size, it is a relatively concentrated fund, as almost half of the fund's assets are invested in its ten largest holdings.

Given that the underlying MSCI US REIT index represents so much of the domestic REIT universe, this fund covers a very large portion of the U.S. REIT market, making it a rare "one -stop" option for investors looking to gain exposure to U.S. real estate. VNQ also has solid liquidity, which means that investors can look at this as a viable trading instrument if they so wish .

VNQ is also unique in that, like so many Vanguard funds, its expense ratio is very low; at 0.10%, VNQ offers one of the cheapest REIT ETF investment opportunities in the market.

How It Fits

Most investment advisers believe that real estate should be a core holding in almost all portfolios (due largely to its low correlation with equities and resistance to inflation). While the recent housing market crash was hard on many real estate companies, these periods are relatively rare over the long-haul .

VNQ can deliver impressive returns and those returns do not always line up with bull markets in equities or bonds, meaning that this ETF can offer good diversification within a balanced portfolio.

With its considerable liquidity, VNQ is also a solid option for investors looking for a trading vehicle to access the U.S. real estate market; as such VNQ can fill a role in more elaborate pair trading or options-based strategies.

What It'll Cost You

VNQ is one of the cheapest funds on the market today. With its expense ratio of 0.10%, VNQ is the second-cheapest ETF in the real estate universe, second only to Schwab's U.S. REIT ETF (SCHH). The expense ratio range for U.S.-focused REIT ETFs reaches from 0.07% to 0.80%, with a category average of 0.42%.

Investors who have accounts at TD Ameritrade or Vanguard can save even more, as this fund is available free of commissions at these two brokerages.

Under the Hood

VNQ's portfolio consists of over 100 U.S. REITs, with its top ten holdings making up nearly half of the total assets under management. While that sort of concentration does create some company-specific risk, those top ten holdings are themselves reasonably diverse with respect to the sub-industries they represent,includingoffice, retail, storage, healthcare REITs .

While the underlying index that VNQ reflects does use a market cap-weighted approach, there is that aforementioned "free float" adjustment at play in the weightings. Nevertheless, VNQ's holdings are weighted heavily towards the largest REITs in the country, which typically means that investors are trading off growth potential for stability.

According to VNQ's fact sheet, this ETF allocates roughly a quarter of its total assets each to specialized REITs and retail REITs, with industrial firms accounting for the smallest chunk of exposure.

Yield, Volatility and Performance

VNQ pays out a quarterly dividend distribution to shareholders, serving as a viable option for investors looking to beef up their portfolio's current-income .

VNQ has logged a good run of performance since its launch in 2004, with only two down years. Since 2008, VNQ has produced the following returns: 2008 (-36.9%), 2009 (+30.1%), 2010 (+28.4%), and 2011 (+8.6%). By comparison, the S&P 500 ETF (SPY) has returned the following:2008 (-36.8%), 2009 (+26.4%), 2010 (+15.1%), and 2011 (+1.9%).

Other Options

Within the broader domestic and international REIT categories, investors have more than two dozen other ETF choices. While some offer broadly similar exposures as VNQ, others employ notably different strategies.

  • Charles Schwab U.S. REIT ETF :This is the cheapest fund available, with an expense ratio of 0.07% (and commission-free trading for Schwab customers). Although this fund's allocations are broadly similar to VNQ, it holds fewer positions and is somewhat more concentrated in its top holdings.
  • PowerShares Active U.S. Real Estate Fund :This is an actively-managed alternative to the market cap-weighted products that dominate the category, but the expense ratio is quite high at 0.8%.
  • iShares FTSE EPRA/NAREIT Global Real Estate Ex-U.S. Index Fund :This is the second-largest global real estate ETF and, as the name suggests, it offers exposure to non-U.S. real estate companies.
  • IndexIQ's US Real Estate Small Cap ETF : This fund offers investors exposure to smaller real estate companies. However, the expense ratio here is on the high end of the range (0.69%) and the fund is relatively illiquid.

Disclosure: No positions at time of writing.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!