The Vanguard REIT ETF (NYSEARCA: VNQ) is an exchange-traded fund (ETF) that invests in real estate investment trusts, or REITs, and is up 8.84% since its inception in 2004. The REITs own office buildings, hotels and other real estate property. Real estate is a very different asset than stocks and bonds and may provide a good way for investors to diversify their portfolios.
VNQ had assets of around $50 billion in June of 2015. All of the REITs the fund holds are publicly traded. The fund seeks to track the performance of the MSCI US REIT Index by investing in the components of that index.
REITs are securities traded on stock exchanges that invest in real estate. There are three types of REITs. Equity REITs invest in and own properties and derive income from the rental of properties. Mortgage REITs invest in mortgages by buying them directly or investing in mortgage-backed securities (MBS). Hybrid REITs are a combination of the equity and mortgage REITs.
REITs are required to comply with a number of regulations. One major point is REITs must distribute at least 90% of their taxable incomes per year to investors. They are then allowed to deduct these dividends paid from their taxable income. Other regulations require REITs to hold at least 75% of their assets in real estate, cash or U.S. Treasurys. Shares in the REIT must be held by at least 100 shareholders.
VNQ is based on a Vanguard mutual fund that tracks the same index. As of 2015, VNQ has 145 holdings with net assets of $50.2 billion. The fund has a very low expense ratio of 0.12%, which is 91% lower than the industry average. Vanguard Equity Investment Group is the ETF adviser. The fund pays a substantial dividend yield of 3.9%, which is attractive to many investors. The price-to-earnings (P/E) ratio for the fund’s holdings is 35.7, with a price-to-book (P/B) ratio of 2.3.
The 10 largest holdings comprise 36.4% of the fund’s total net assets. The fund’s largest holding is Simon Property Group, Inc. (SPG), with a weighting of 8.2%. The second largest holding is Public Storage (PSA), with a weighting of 4.1%. For a sector breakdown, the largest REIT sector was retail with a weighting of 25.1%, followed by residential with a weighting of 16.8%. Office REITs had the third largest weighting with 16.3%.
Suitability and Recommendations
VNQ has had solid performance, up over 14% in the past five years as of 2015. The fund has returned over 8% since 2012. A hypothetical investment of $10,000 since the fund’s inception would be worth around $20,000. The fund did experience a drawdown during the financial crisis of 2008. Shares went from around $68 at the beginning of 2007 to a low of around $19 per share in March of 2008. The economic crisis impacted the real estate market in particular. Thus, it is clear that another downturn in the real estate market could dramatically impact an investment in the fund.
Still, VNQ is an excellent way for investors to diversify their portfolios with exposure to the real estate market. Modern portfolio theory (MPT) seeks to construct optimized portfolios by measuring the diversification of the assets in the portfolio. The fund has a low beta of 0.33 versus the larger stock market. The fund also has a low R-squared of 0.04 with the stock market. This indicates that the fund’s returns are statistically not related to the movement of the stock market. Further, rather than having to invest directly in real estate, investors can easily buy and sell shares of the ETF. This makes diversification easy and cost effective.