History has demonstrated time and again the inherent resilience and recuperative powers of the American economy. – Ben Bernanke

Vanguard’s Real Estate ETF (NYSEARCA:VNQ) is a suitable investment option for those investors who prioritize a constant stream of income over capital appreciation. Since regulations require REITs to distribute 90% of their annual taxable income through dividends, these types of investments usually offer a high yield. An improving U.S. economy will enable this ETF to outperform since, with rising economic activity, landlords can ask for higher rents for their properties. However, investors should be aware of the flipside scenario, as well. The real estate sector is rate-sensitive and underperforms in a rising rate scenario.

The fund’s AUM is ~$30.33bn, and it has a trailing dividend yield of 3.49%. With an expense ratio of 0.12%, it’s relatively cheaper compared with peers. Year to date, the fund is down around 8.8%, as is the case with all other Real Estate ETFs, given the current economic slowdown.

Constituent Holdings

VNQ is the largest diversified Real Estate ETF comprised of individual REITs, publicly traded property owners, and real estate-focused businesses. Attached below is a list of its top 10 holdings, representing ~50% of the ETF’s value.

Source: Seeking Alpha & Vanguard

Included in the list are communication infrastructure giants American Tower (AMT), the largest REIT in America measured by market capitalization, Crown Castle International (CCI), and SBA Communications (SBAC). These companies are engaged in managing network communication systems, a segment expected to witness immense growth in the future. It also includes data center operators Equinix (EQIX) and Digital Realty Trust (DLR). On the list, we also have Public Storage (PSA), the biggest self-storage warehouse REIT in the U.S., Welltower (WELL), one of the largest REITs focusing on senior living and medical office buildings. Also, part of VNQ’s top 10 holdings is Prologis (PLD), which owns and operates ~4,000 industrial and logistics facilities, and Weyerhaeuser (WY), which manages ~26mn acres of timberlands in North America. In total, the ETF has 183 holdings.

READ ALSO  SE: Fed Chair Powell Is Optimistic About U.S. Economy Recovering

We can also see the fund allocation by segment. We notice that specialized REITs form a significant part of the ETF’s structure with a 41.7% contribution. This allocation has increased by more than 10% since the fund last reported its holding structure in January 2020. This tells us that the ETF is increasingly diversifying its real estate investments.

The ETF also has significant exposure to healthcare, industrials, and residential segments. Though the retail real estate segment is currently witnessing a fundamental shift as more people increasingly shopping online, the ETF’s exposure to this segment is limited at 8%.

Comparison With Other Real Estate REITs

VNQ is reasonably valued compared to similar ETFs in terms of P/E and P/S ratios. Below is a quick comparison of VNQ and the various alternatives.

P/E

P/B

P/S

Vanguard Real Estate ETF (VNQ)

36.46

2.14

4.81

iShares U.S. Real Estate ETF (IYR)

33.45

2.22

5.50

Schwab U.S. REIT (SCHH)

36.96

2.01

5.94

iShares Cohen & Steers REIT ETF (ICF)

45.03

2.27

7.55

Fidelity MSCI Real Estate Index ETF (FREL)

34.96

2.01

4.55

SPDR Dow Jones REIT ETF (RWR)

38.39

1.64

5.82

Source: Morningstar

VNQ

IYR

SCHH

ICF

FREL

RWR

Issuer

Vanguard

iShares

Schwab

iShares

Fidelity

State Street

Inception

09/23/2004

06/12/2000

01/13/2011

01/29/2001

02/02/2015

04/23/2001

Expense Ratio

0.12%

0.42%

0.07%

0.34%

0.08%

0.25%

AUM

$30.33Bn

$4.85Bn

$4.53Bn

$1.93Bn

$1.14Bn

$1.34Bn

Holdings

183

86

147

34

170

117

Assets in Top 10

49.24%

45.93%

44.33%

60.99%

42.92%

41.82%

5 Year Price Performance

6.80%

13.11%

(3.25%)

11.46%

11.63%

(4.65%)

TTM Dividend Yield

3.49%

2.94%

3.04%

2.47%

3.34%

3.57%

3 Yr. Dividend CAGR

(7.52%)

(5.77%)

4.57%

(10.77%)

(0.50%)

(5.78%)

Source: Seeking Alpha

READ ALSO  Russia to withdraw from Open Skies defence treaty

As we can see from the table above, VNQ is the largest REIT amongst its peers and is a relatively cheap ETF to invest in with an expense ratio of 0.12%. Furthermore, its dividend yield is significantly higher than its peers and is only second to RWR by a minuscule margin.

Also, VNQ is the most diversified Real Estate REIT with 183 holdings, which significantly helps to de-risk the portfolio.

What are the risks to be considered?

A slowdown in the economy affecting dividend payments

The current downturn in the coronavirus pandemic’s economy will continue to harm real estate in the medium term. This situation has led to lower rents, higher vacancies, and a reduction in property owners’ cash flow.

Asset concentration risk

Because VNQ is heavily weighted in its ten largest holdings, its performance may be hurt disproportionately by relatively few stocks’ poor performance. Due to the current economic scenario, a few of its top 10 holdings have cut dividend payouts in 2020, which could adversely affect the ETF’s income stream.

REITs can provide investors with diversification benefits, given their low correlation with most other asset classes. 2019 was a good year for REITs as the Fed kept a dovish stance on policy rates. Falling interest rates translated into lower borrowing costs for REITs, thereby improving their ability to purchase or develop real estate. VNQ is a high-quality fund that has diversified its real estate exposure wisely. Though some real estate segments such as retail might be seeing a fundamental shift currently, the ETF’s investments in other specialized components will help provide some cushion to the downside during uncertain times.

The current monetary environment favors REIT investments since institutional investors such as pension funds look away from bonds for yield. VNQ provides decent dividend yields and comes with a low-cost structure. It has de-risked its holdings by investing in more specialized REITs, and this strategy could pay off handsomely in the long term. Additionally, the ETF has outperformed the majority of its peers from a dividend standpoint and, hence, would make a great addition to one’s portfolio for the long term.

READ ALSO  Pandemic Pushes Russia’s Gold Reserves Above U.S. Dollars For First Ever Time

*Like this article? Don’t forget to click the Follow button above!

Anticipate Crashes, Corrections, and Bear Markets

Sometimes, you might not realize your biggest portfolio risks until it’s too late.

That’s why it’s important to pay attention to the right market data, analysis, and insights on a daily basis. Being a passive investor puts you at unnecessary risk. When you stay informed on key signals and indicators, you’ll take control of your financial future.

My award-winning market research gives you everything you need to know each day, so you can be ready to act when it matters most.

Click here to gain access and try the Lead-Lag Report FREE for 14 days.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Via SeekingAlpha.com

  • bitcoinBitcoin (BTC) $ 35,829.00
  • ethereumEthereum (ETH) $ 1,162.78
  • tetherTether (USDT) $ 0.998982
  • litecoinLitecoin (LTC) $ 140.88
  • bitcoin-cashBitcoin Cash (BCH) $ 478.42