Analysis of Vanguard REIT ETF (VNQ)

by Mike Holman

I had recently written about my decision to buy some REITs (Real Estate Investment Trusts). REITs are a good way to add diversification to your portfolio since they are not closely correlated with equity returns. In the last post I looked at an ETF and several individual Canadian REITs. I’ve been thinking that I will put half of my REIT allocation into American REITs. The 50/50 split is a vary arbitrary number – there are lots of good reasons why I should own more US REITs compared to Canadian and there are lots of more good reasons why I should focus on Canadian REITs. That will be a discussion for another day.

One of the problems with the ishares REIT ETF (XRE) is the higher management fee of 0.55% which is high for a general REIT. I took a look at the Vanguard ETF lineup to see if it had a similar product for U.S. REITs and sure enough I found VNQ – Vanguard REIT ETF.

VNQ management fee (MER)

This ETF has a management fee of only 0.12% which is very reasonable, so in my opinion if you want to index with U.S. REITs then this ETF is a better choice than trying to buy a pile of individual securities.

What the VNQ REIT covers

According to the Vanguard VNQ strategy and policy page, VNQ tracks the MSCI US REIT Index which is a benchmark that tracks approximately two-thirds of the U.S. REIT market.

Summary

This ETF looks like the right one for me. I will be purchasing some VNQ (amex:vnq) in the near future and it will make up one half of my REIT allocation. Stay tuned for the exciting conclusion of what I finally decide to buy for my Canadian REIT allocation.

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{ 7 comments… read them below or add one }

1 KM

I was researching Cdn REIT’s recently as well and found that XRE is comprised 25% of REI.UN and 15% of HR.UN. So the correlation of XRE to these two alone is huge.

I would skip XRE and pick 2 or 3 of the top 5 REIT’s. This gives zero mgmt fees and the dividend yields will also be higher.

2 Four Pillars

Hi KM – thanks for the comment!

You must have missed my last 14 posts on REITS. 🙂

I was looking at just buying some of the top reits in XRE for the Canadian REIT portion and I’m really leaning towards just having Riocan.

50% Riocan and 50% VNQ

3 Kyle

I own the mutual fund version of this ETF in my ROTH and I’ve been happy with it. There are a few sectors it doesn’t include at all, like mortgage REITs, but it gets the job done. Now if I could just find a good foreign REIT fund.

4 Mr. Cheap

I’ll be looking forward to your post on your Canadian REIT allocation (are you going to include your home in this portion?).

5 Four Pillars

Kyle – I haven’t seen one of those.

Cheap – I won’t be including my home in the real estate asset class. I can see why people do that but in my mind it doesn’t make sense for me.

It doesn’t matter to me what my home is worth – an increase in value or decrease in value won’t change anything even if I’m retired (unless I downsize). REITs on the other hand will be part of a portfolio providing retirement income so the REIT value will be very important.

Not sure if that answer is relevant to the question.

6 ryan

i own VNQ. i wanted to switch to FFR which is an internation REIT index with a 39% US portion.

the only problem was that it is so thinly traded that Schwab would only sell in round lots (100 shares), which was $4500 a trade at the time.

maybe later, but i dont roll on that level for my REIT portion just yet. stuck with the VNQ.

7 Four Pillars

Ryan, I’ll have to look at FFR – that might be even better for me. I’m not crazy about thinly traded securities however.

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