Blood in the REIT Street

Mortgage rates hit 20-year highs.

Home sales are in the toilet. 

Yet, if history is any indication, price will eventually rebound. 

With real estate markets beaten down this year, it’s no shock to see financial pros looking into Vanguard Real Estate ETF (VNQ), the most searched real estate ETF over the last month. 

Yet, REITs can be a tricky business.

Not only do they offer different tax treatments, but some exclusively hold apartment buildings while others focus on commercial properties.

Where does VNQ land in the mix?

The Vanguard Real Estate ETF (VNQ) 

Vanguard Real Estate ETF (VNQ) invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property. 

There are 167 stocks in VNQ. Here are the portfolio characteristics:

P/E Ratio 24.6x

P/B Ratio 2.0x

Return on Equity 7.9%

Median Market Cap $22.6 billion

Earnings Growth Rate 11.0%

VNQ is diversified in many sectors involving real estate. Specialized REITs comprise 38% of the weighted portfolio, followed by Residential REITs at 15.3%, Retail REITs at 11.4%, Industrial REITs at 11.4%, with the remainder spread amongst various subsectors.

You can see the full breakdown below:

The largest holding in the portfolio isn’t an individual stock but the Vanguard Real Estate II Index Fund Institutional Plus Shares, accounting for 11.87% of the ETFs weighting. 

That means its largest holding isn’t a company but another fund.

Here are the top ten positions in the portfolio:

VNQ has a lengthy track record dating back to September 2004. 

Since its inception, it has returned 267% to investors and 91% over the last ten years. However, it’s down -2.5% over the last 3-years. 

Trading VNQ

VNQ is actively traded, with a daily average volume of 5.2 million shares. Traders can also play VNQ via options, though only monthly expirations are available.

Investing In VNQ

VNQ charges an ultra-low expense ratio of 0.12%. Plus, it pays an annual dividend yield of 3.86% or $3.12 per share.

Alternatives to VNQ

Investors have several options when selecting a real estate ETF. Some alternatives to VNQ include Schwab U.S. REIT ETF (SCHH), The Real Estate Select Sector SPDR Fund (XLRE), iShares U.S. Real Estate ETF (IYR), and iShares Cohen & Steers REIT ETF (ICF). 

Portfolio Comparison- Number of Positions

VNQ 167 positions

SCHH 135 positions

ICF 29 positions

XLRE 31 positions

IYR 79 positions

VNQ offers the greatest diversification of the group, while ICF is the most concentrated. 

Fees Comparison- Expense Ratio

VNQ 0.12%

SCHH 0.07%

ICF 0.32%

XLRE 0.10%

IYR 0.39%

SCHH is the cheapest real estate ETF, and IYR is the most expensive.  

Income Comparison- Dividend Yield  

VNQ 3.86%

SCHH 3.22%

ICF 2.88%

XLRE 4.57%

IYR 3.44%

XLRE offers the most attractive dividend yield at 4.57%, followed by VNQ at 3.86%. 

Performance Comparison- 5-Year Annualized Returns

VNQ 4.00%

SCHH 0.75%

ICF 3.95%

XLRE 5.69%

IYR 3.36%

Investors typically buy real estate ETFs for the dividend power. However, all the ETFs mentioned above have experienced growth. XLRE has performed the best, returning 5.69% annually over the last 5-years. 

Price Comparison- Share Price

VNQ $80.67

SCHH $18.76

ICF $53.02

XLRE $35.71

IYR $81.58

Our Opinion 7/10

Interest rates are increasing, and fears of a recession are approaching. 

However, many of the real estate ETFs mentioned are already down 20-35%. 

While things can undoubtedly worsen, real estate has a history of bouncing back strongly. 

We think buying VNQ at these levels should pay off over the next few years. 

However, if you were to pick just one from the group mentioned, we like XLRE the best because it has performed better, has a lower share price, and pays out a higher dividend.