Vanguard offers dozens of index funds, and most of them pay dividends to one extent or another. Some even have things like 'high dividend' in their titles. And many of them are excellent index funds for long-term investors to add to their portfolios.
However, there is one high-yield Vanguard index fund I'm watching very closely right now, and I think it could be a big winner over the next few years. I'm talking about the Vanguard Real Estate ETF (VNQ 0.03%), which has dramatically underperformed the S&P 500 over the past decade but could be at an inflection point.
Image source: Getty Images.
The Vanguard Real Estate ETF in a nutshell
As the name suggests, this is an index fund that invests in the real estate sector -- specifically in real estate investment trusts (REITs). If you aren't familiar, a REIT (pronounced 'reet') is a special type of company designed to hold real estate assets, which gets special tax advantages if it distributes at least 90% of taxable income as dividends.
The Vanguard Real Estate ETF owns 154 different stocks, and is a weighted index fund, meaning that larger companies make up a greater percentage of the fund's assets. Top holdings include:
|
Company Name (Symbol) |
Real Estate Specialty |
% of VNQ Assets |
|---|---|---|
|
Welltower (WELL 0.71%) |
Healthcare |
6.2% |
|
Prologis (PLD -0.08%) |
Industrial |
5.9% |
|
American Tower (AMT 0.05%) |
Communications Infrastructure |
5.4% |
|
Equinix (EQIX -1.05%) |
Data Centers |
4.3% |
|
Simon Property Group (SPG 0.26%) |
Shopping Malls |
3.3% |
Data source: Vanguard. As of 8/31/2025.
Essentially, the Vanguard Real Estate ETF is designed to give investors diverse exposure to REITs at a minimal expense. And speaking of expense, it has an ultra-low 0.13% expense ratio. It is also an excellent income ETF, with an annualized yield of nearly 4% at the current share price.
Are REITs at an inflection point?
I won't sugar-coat it. The Vanguard Real Estate ETF has dramatically underperformed the S&P 500 over the past decade, with a total return of just 77% versus 307% for the larger benchmark index.
However, this is more a product of the macroeconomic environment than anything wrong with the underlying REITs. In short, REITs are highly rate sensitive. I'll discuss the reasons why in just a bit, but over the past 10 years, we've essentially had two rising-rate environments with a global pandemic in between. Right now, the benchmark federal funds rate is 400 basis points higher than it was a decade ago.
Lower interest rates can provide a positive catalyst for real estate investment trusts, and for a few reasons:
- REITs are yield-focused investments. When yields on risk-free instruments (like CDs and Treasuries) go down, REIT yields tend to move in the same direction. Since yield and stock prices have an inverse relationship, this can push prices higher.
- REITs tend to rely on borrowed money more than the typical publicly traded company. Just like how most homeowners use a mortgage to fund their purchase, REITs typically use borrowed money as part of their growth strategy. Lower rates mean cheaper borrowing costs.
- Finally, commercial properties derive much of their value from the interest rate environment. In other words, if a property generates $100,000 in annual net operating income, investors are willing to pay more if the risk-free interest rate is 2% versus 5%.
According to the CME Group's FedWatch tool, investors have a median expectation of another four 0.25% rate cuts over the next year. This could be a positive tailwind for REITs, especially if gradual rate cuts continue beyond that point.
In a nutshell, while nobody can predict the future, it's likely that interest rates will be substantially lower in a year or two than they are today. And that would likely be a catalyst for REIT outperformance. With the Fed just starting to resume interest rate cuts, now could be a great time to buy.
