VNQ: A David Vs. Goliath Story

Feb. 06, 2020 11:00 AM ETVanguard Real Estate ETF (VNQ)SCHH, RWR, XLRE, IYR, ICF47 Comments

Summary

  • Real estate ETFs are an excellent option for investors seeking low-cost, liquid, and diversified exposure to real estate. ETFs can complement or "anchor" an actively-managed strategy of selecting individual REITs.
  • Our ETF Spotlight Series has taken us across the fund landscape from High Yield REIT ETFs and CEFs to newer innovative funds offering a more growth-oriented approach to real estate.
  • The plain-vanilla "Core REIT" ETFs still rule the day, however, led by Goliath VNQ. We compare VNQ to five other ETFs that offer "cheap beta" exposure to commercial real estate.
  • Due to the market-capitalization weighting system and the dynamics of the REIT sector, these ETFs tend to overweight the largest and relatively highest-valued and lowest-yielding REITs.
  • With as much as 60% of weight in its Top-10 holdings, these ETFs may not offer the level of diversification that many investors assume. The property sector exposure also varies significantly between these funds.
  • This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate ETF Spotlight

Real Estate ETFs are an excellent option for investors seeking low-cost, liquid, and diversified exposure to real estate. With nearly six dozen real estate ETFs to choose from, there's something for nearly every investor at every life stage and level of risk tolerance. ETFs can be used as the primary source of an investor's exposure to real estate or can complement or "anchor" an actively-managed strategy of selecting individual REITs. In our ETF Spotlight series, we take a look under the hood of some of the most popular real estate ETFs and highlight the strengths and idiosyncrasies of these funds.

real estate etfs

(Hoya Capital, Co-Produced with Brad Thomas through iREIT on Alpha)

"Core REIT" ETF Overview

Our ETF Spotlight Series has taken us across the fund landscape from High Yield REIT ETFs and Real Estate CEFs to newer, innovative funds offering a more growth-oriented or specialized approach to real estate investing. Recent innovation in the real estate ETF space has enabled investors to better customize their real estate portfolios toward their specific needs, objectives, and existing exposures, but the plain-vanilla "Core REIT" ETFs, which offer "cheap beta" exposure to commercial real estate, still rule the day from an AUM perspective. In this report, we focus in on the six most popular ETFs in the category.

"Core REIT" ETFs are distinguished by their market capitalization weighting system, exposure across most equity REIT property sectors, and ultra-low expense ratio - which averages roughly 20 basis points - a fraction of the typical actively-managed mutual fund or CEF. A theme that we'll discuss throughout this report, due to the market-capitalization weighting system and the inherent "top-heavy" dynamics of the REIT sector, these ETFs naturally overweight the largest "Goliath" REITs, which also tend to be the most expensive (based on FFO and AFFO multiples) and also the lowest-yielding.

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 Visit www.HoyaCapital.com for more information and important disclosures. Hoya Capital Research is an affiliate of Hoya Capital Real Estate ("Hoya Capital"), a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. 

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Hoya Capital Real Estate ("Hoya Capital") is a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations is an affiliate that provides non-advisory services including research and index administration focused on publicly traded securities in the real estate industry.

This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.

The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.

Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.

Hoya Capital has no business relationship with any company discussed or mentioned and never receives compensation from any company discussed or mentioned. Hoya Capital, its affiliates, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings and additional important disclosures is available at www.HoyaCapital.com.

Disclosure: I am/we are long VNQ, SPG, AMT, PLD, EQIX, PSA, WELL, EQR, ESS. 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: Hoya Capital Real Estate advises an ETF. In addition to the long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index. It is not possible to invest directly in an index. Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com.

Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. All commentary published by Hoya Capital Real Estate is available free of charge and is for informational purposes only and is not intended as investment advice. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy. Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com.

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