Investing in real estate has been a great way to grow wealth over the long term. Real estate tends to steadily appreciate in value, typically at rates above inflation. In addition, real estate investments generate income.
One of the easiest and most cost-effective ways to invest in real estate is to purchase a real estate investment trust (REIT). The simplest way to invest broadly in REITs is through an exchange-traded fund (ETF), such as the Vanguard Real Estate ETF (VNQ 1.61%). Those and other features make it a no-brainer to invest $1,000 in the Vanguard ETF this July.
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Become a real estate mogul with one fund
The Vanguard Real Estate ETF invests broadly across the entire REIT sector. It holds over 150 REITs in all property sectors. Its biggest holdings are the largest REITs:
- Vanguard Real Estate II Index Fund Institutional Plus Shares (14% of its net assets): An index fund that invests in REITs.
- Prologis (6%): The leading industrial REIT focused on logistics properties.
- American Tower (5.9%): A leading tower and data center REIT.
- Welltower (5.4%): A healthcare REIT primarily focused on senior housing properties.
- Equinix (4.4%): A leading data center REIT.
- Simon Property (3.1%): A leading mall REIT.
- Realty Income (2.94%): A diversified net lease REIT with retail, industrial, gaming, and other properties.
- Public Storage (2.7%): A leading self-storage REIT.
- Crown Castle (2.6%): A large U.S. tower REIT.
As that group demonstrates, the fund offers investors diversified exposure to commercial real estate.
Its largest holdings have excellent records of growing value for investors. For example, Realty Income has increased its monthly dividend 131 times since its public market listing in 1994, including for the past 111 consecutive quarters. The REIT has grown its dividend at a 4.2% compound annual rate during that period. That growing dividend has helped Realty Income deliver a robust 13.6% compound annual total return since its listing three decades ago.
Prologis has also been a value-creating machine. Despite its massive size, the logistics behemoth has grown its core funds from operations (FFO) per share at a 12% compound annual rate over the past five years. That's faster than the S&P 500's 9% and the 6% for other REITs. It has also delivered robust compound annual dividend growth during that period of 13% compared to 6% for REITs and 5% for the S&P 500.
Solid total returns
The Vanguard Real Estate ETF has been a solid performer over the years. The REIT ETF has delivered a 7.4% average annualized total return since its inception in September 2004. At that rate, the fund would have turned a $1,000 investment into over $4,400:
VNQ Total Return Level data by YCharts
Dividends paid by the REITs and reinvested into the fund have been a big driver of the ETF's total return. The Vanguard Real Estate ETF currently has a 3.6% yield. A $1,000 investment would generate $36 of annual income at that rate.
The combination of value appreciation and income should enable this fund to continue producing solid returns for investors. If the fund can maintain its current annualized return, it could turn a $1,000 investment made this July into $9,145 in 30 years.
There's no guarantee the fund can deliver that level of return in the future. However, REITs have outperformed stocks over the last 20-plus years. Given that data, the fund could potentially produce even higher returns over the long haul.
A wise investment
Real estate has historically been a sound long-term investment. Vanguard makes it easy to add real estate to your portfolio through the Vanguard Real Estate ETF. The fund has been a solid performer over the long term, benefiting from the growth and income produced by REITs. Those features make it a no-brainer to invest $1,000 in this ETF this July.
