ETF Talk: A Real Good Deal in Real Estate

“The desire of gold is not for gold. It is for the means of freedom and benefit.”

— Ralph Waldo Emerson

Real estate has always offered a unique blend of stability, income and long-term growth; however, accessing it traditionally meant taking on debt, maintenance and the hassle of interacting with tenants.

Today, investors can capture the same core advantages without the complexity of property ownership, while still benefiting from the diversification and income characteristics that make the asset class so valuable. As interest rates stabilize and the property sector regains momentum, now is the time to invest in real estate.

The Vanguard Real Estate Index Fund ETF (VNQ) offers investors a simple, diversified way to tap into the long-term growth and income potential of the real estate market. Instead of picking individual real estate income tax (REITs) or managing physical properties, VNQ provides broad exposure to hundreds of professionally managed real estate companies across sectors like industrial, residential, retail, storage and data centers. This wide diversification helps smooth out risk while still allowing investors to benefit from the underlying strength of the real estate economy.

Income-focused investors would also benefit from a position in VNQ. Because REITs are required to distribute most of their earnings as dividends, VNQ typically provides a higher yield than the overall stock market. The combination of consistent income and potential long-term appreciation makes the fund a compelling option for investors looking to generate more cash with their portfolios.

The fund has net assets of $65.68 billion and a yield of 3.86%. It also carries a very low expense ratio of just 0.13%. The fund has seen nice returns this year, up 0.17% over the last month, 3.72% over the last three months and 5.73% for the year to date.

The top 10 holdings account for about 51.31% of the portfolio’s assets and include Vanguard Real Estate II (NASDAQ: VRTPX), 14.43%, Welltower Inc. (NYSE: WELL), 6.55%, Prologis, Inc. (NYSE: PLD), 5.97%, American Tower Corporation (NYSE: AMT), 5.06%, Equinix (NASDAQ: EQIX), 4.30%, Simon Property Group (NYSE: SPG), 3.44%, Digital Realty Trust, Inc. (NYSE: DLR), 3.27 %, Realty Income Corporation (NYSE: O), 3.08%, CBRE Group Inc. (NYSE: CBRE), 2.64% and Public Storage (NYSE: PSA), 2.56%.

Chart courtesy of www.stockcharts.com.

The Federal Reserve is expected to lower interest rates in December, although markets are bracing for the possibility the Fed pauses in December due to the lack of official economic data caused by the government shutdown. Interest rates can have a significant effect on REITs because they depend on borrowed money for growth, and rising rates can lower the value of commercial properties. A Fed rate cut could allow investors to rotate money into the sector and serve as an upward catalyst for the entire sector.

However, don’t just take my word for it. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

In the name of the best within us,

Jim Woods