Why Vanguard VNQ is the Best REIT ETF

Real estate investment trusts (REITs) offer the ability to invest in commercial real estate within the comfort of your brokerage account. ETFs in turn offer the ability to invest in a diversified basket of REITs. The Morningstar article This REIT ETF Remains Prettiest on the Block by Abby Woodham offers up reasons why the Vanguard REIT ETF (VNQ) is the optimal choice, including comparisons with similar products. Highlights:

  • Low expense ratio. VNQ expense ratio is 0.10%.
  • Low tracking error. VNQ’s historical performance only lags its benchmark index by 0.03%, a number even lower than its expense ratio.
  • Large, mid, and small-cap exposure. VNQ’s holdings include smaller REITs that other ETFs often exclude.
  • Exclusions. VNQ excludes mortgage REITs and non-real-estate specialty REITs (timber, prisons). This could be considered good or bad, as these will act differently than traditional REITs. I kind of like timber REITs, though.
  • Schwab US REIT ETF (SCHH) is slightly cheaper (0.07% e.r.) but lacks small-cap exposure.
  • iShares US Real Estate ETF (IYR) includes Mortgage and Specialty REITs but is more expensive (0.46% e.r.)

I agree with most of the points made; I use VNQ for my REIT exposure. It’s good to learn more about the competition as well. The same underlying holdings of VNQ are also available in mutual fund form:

  • Vanguard REIT Index Fund Investor Shares (VGSIX) – $3,000 minimum
  • Vanguard REIT Index Fund Admiral Shares (VGSLX) – $10,000 minimum

Comments

  1. Sounds tempting but I will pass for two reasons :
    1. I am already intrested in real estate through my mortgage

    2. There would be less and less need of commercial real estate due to e-commerce (Sears doesn’t know what do to with its stores for example) and telecommuting.

    • Chris in Boston says:

      Investing in real estate by way of your mortgage is great, but that will be less liquid than investing in VNQ. I prefer to have as much of my assets in a liquid form. VNQ is very easy to sell off should you need to raise capital quickly for whatever reason. Maybe an emergency, health crisis, major repairs, or maybe even a buying opportunity arises. If you put your assets into paying down your mortgage you would need to go to the bank to get cash out of the house. I’d rather be as liquid as possible.

  2. I’m much older then you but I’m still curious why these funds are so attractive to you. I look at yield because I live on my investment income. So when I see yields of less then 3% I have no interest at all. I do care a bit about capital accumulation but its not my primary focus.

    • In this low interest rate environment, looking at yield in isolation often exposes you to some form of increased risk. Free lunches are hard to find. You are free to share which investments are currently attractive to you.

      • For 6 plus years I’ve had just under 10% of my portfolio in Canadian Rate Resets which are sort of like and not like US preferreds and a few US preferreds as well. Up until this year when the reset occured they’ve earned 5.5%-6% in Canada and of course there are a number of good quality US non-cumulative and a few cumulative preferreds paying 5.5% to 6.5% right now. I view them as a means to improve my average yield and not as a core investment. Curious with all the things you’ve experimented with you haven’t ever mentioned them. And I choose my own preferreds I don’t use an etf.

  3. That Morningstar link works only if you are a member: do they mention anything about RWR (SPDR Dow Jones REIT Idx) in that article? A vanilla chart between VNQ and RWR show RWR higher over several time windows, but you never know how they calculate dividends. Currently RWR is .34% higher YTD (as of June 30).

  4. Jacob B says:

    I like the Idea of getting in to Real Estate to Diversify, and i really like Index funds (due to a lot of reasons I wont go into here.)

    My question is, is it to late to get into this fund, since that this article will have a inflating effect on the fund, plus it looks like it is near the 5 year high on the fund. Do you really think the real Estate market is going to get better than it was in 2006 any time soon?

    • Many REIT valuation ratios are currently high relative to historical averages, but that is also the case for many other asset classes. I’m reliably crappy at market timing, so I just try to take a long-term view of things. Will REITs be higher in 20 years? I think so.

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