Real estate is an asset class that could be a smart addition to any investor's portfolio. Over the long term, real estate investment trusts, or REITs, have produced returns that are on par with the S&P 500, and with lower historical volatility. REITs also tend to pay above-average dividend yields, making them great choices for income investors. And finally, real estate returns aren't well correlated with the overall stock market, which can help provide a nice hedge in turbulent times.
Investors can get exposure to real estate without buying investment properties or choosing individual REITs to invest in. There are several great real estate ETFs available, and the Vanguard Real Estate ETF (VNQ +0.24%) can be an excellent choice.
NYSEMKT: VNQ
Key Data Points
About the Vanguard Real Estate ETF
As the name implies, the Vanguard Real Estate ETF invests in real estate investment trusts. It is an index fund that tracks a weighted REIT index, meaning that larger companies carry a greater weight in the fund's assets.
The ETF owns 165 stocks in all and is well-diversified among the real estate subsectors – things like multifamily, office, industrial, hospitality, telecommunications, and healthcare to name a few. No more than 15% of the fund's assets are invested in any one real estate subsector, which can be a big advantage over individual REITs, since investors won't get hit too hard if a particular property type isn't doing well. For example, office real estate has been beaten down particularly hard recently, but it only makes up about 5% of the Vanguard Real Estate ETF.
Top holdings include industrial real estate giant Prologis (PLD +1.25%), the two major telecom REITs American Tower (AMT 1.80%) and Crown Castle (CCI 0.55%), data center leader Equinix (EQIX +0.50%), and self-storage operator Public Storage (PSA +0.55%).
The Vanguard Real Estate ETF has a low 0.12% expense ratio, which means that your annualized investment fees are just $1.20 for every $1,000 you have invested. All ETFs have fees, but this is one of the lowest expense ratios for a sector-focused ETF you'll find.
And for income investors, the ETF has an excellent 4.2% yield that results from the dividends of its underlying investments being passed through to shareholders.
To be sure, the ETF's performance hasn't exactly been fantastic recently, mainly thanks to rising interest rates. Income-focused investments like REITs are highly sensitive to interest rate movements, and the rapidly rising benchmark interest rates have put pressure on the entire sector. However, REITs should also be a major beneficiary if the Federal Reserve starts to reduce interest rates in the coming years.
Should you buy individual REITs instead?
Unfortunately, there is no one-size-fits-all answer to this question. If you have the time, desire, and knowledge to assess and select individual REIT investments, it can be a great way to try and find the best long-term opportunities. But if not, there is absolutely nothing wrong with an ETF that will simply match the sector's performance over time, and that's especially true while the real estate sector is still about 20% below the highs.
