In this article, we will compare the two to see which one is a better buy at the moment.
While both ETFs charge very low fees to investors, VNQ gets the edge here with its 0.12% expense ratio compared to REET's 0.14% expense ratio. To put this in perspective, on a $100,000 investment, VNQ saves investors $20 per year. This is not materially significant, but it would slightly tip the balance in VNQ's favor all other factors being equal.
VNQ has significant exposure to residential, retail, and industrial REITs, with moderate exposure to health care and office REITs and a small allocation to hospitality REITs and real estate services businesses. It also has a massive allocation to specialized REITs.
In contrast, REET has even higher exposure to industrial, residential, and office REITs with virtually identical exposure to health care REITs and very similar exposure to hospitality REITs. The company also has much larger exposure to diversified REITs and much less exposure to specialized REITs.
The main takeaway here is that REET appears to be a more aggressive bet on value plays like retail and office that are currently facing disruption risk from the COVID-catalyzed e-commerce and work-from-home trends. At the same time, it is also betting more aggressively on industrial REITs and slightly more aggressively on residential REITs and has a significantly higher allocation to diversified REITs with a much smaller allocation to specialized REITs.
Their top 5 individual REIT holdings are as follows:
|1.||Prologis (PLD)||Prologis (PLD)|
|2.||American Tower (AMT)||Equinix (EQIX)|
|3.||Crown Castle International (CCI)||Public Storage (PSA)|
|4.||Equinix (EQIX)||Digital Realty Trust (DLR)|
|5.||Public Storage (PSA)||Realty Income (O)|
REET clearly seems to place a higher premium on data centers with its higher allocation to EQIX and inclusion of DLR on its top 5 list. REET's higher allocation to O also reflects its heavier bet on retail real estate. Meanwhile, VNQ seems to place a higher premium on communications infrastructure with tower and fiber businesses AMT and CCI occupying its number 2 and 3 spots.
It is also worth noting that REET holds 373 positions in its portfolio whereas VNQ only has 164 stocks in its portfolio. This reflects the simple fact that REET targets a global portfolio of REITs whereas VNQ focuses on the U.S. market.
It is pretty hard to say which portfolio is better per se as it really depends on what you are looking for. If you are looking for maximum diversification, international exposure, and tend to favor bolder bets on office and retail as well as data center infrastructure, REET's portfolio looks better. However, if you favor the U.S. market, prefer telecommunications infrastructure to data center infrastructure, and want to keep exposure to retail and office to a minimum, VNQ is probably a better way to go.
Another important consideration to consider is that VNQ's size absolutely dwarfs REET's with VNQ boasting $48.13 billion in assets under management whereas REET only has $3.56 billion in assets under management. This makes VNQ much more liquid for individuals who like to trade in and out of positions frequently as well as a better vehicle for options investors.
VNQ has massively outperformed REET over time:
The biggest reason for this is simply that U.S. stocks have outperformed the rest of the world over the same time span due to strength in the U.S. Dollar and general U.S. economy. Another big reason is that REET has had a higher allocation to office and retail real estate, both of which have been underperformers due to technological disruption. Finally, as already mentioned, VNQ charges a slightly lower fee which has further added to its outperformance.
Moving forward, however, the tables could well turn if international markets begin to outperform the U.S. market after its recent strong run. Furthermore, office and retail real estate currently trade at very cheap valuations compared to the broader REIT sector. As a result, REET offers a 25 basis points higher dividend yield than VNQ does (3% vs. 2.75%) at current prices. If the U.S. slips into stagflation and interest rates continue to soar, it could hamper the domestic real estate market and push more real estate investment capital overseas, turning performance in favor of REET.
Both VNQ and REET offer investors broadly diversified passive exposure to the REIT sector at a low cost and could be decent solutions for a portfolio. Which one is a better buy really depends on a few factors; most significantly, the macro trends involving retail and office real estate as well as the future performance of U.S. vs. international markets. If you are an investor that requires the best possible liquidity and/or access to options, VNQ is the clear winner hands down. REET, meanwhile, is the clear winner for income investors as it offers a better dividend yield.
While we do not fault investors for choosing one or both of these REIT ETFs, we prefer to invest in individual REITs at the moment. The biggest reason for this is the relatively low yields offered by these ETFs in contrast to the 5%+ yields available in high-yielding triple net lease REITs such as STORE Capital (STOR) and W. P. Carey (WPC).
On top of that, VNQ and REET trade near all-time highs today even as interest rates are rising. As a result, the risk-reward profile is not particularly compelling there. By picking individual REITs, we can target the increasingly few bargains left in the market instead of "diworsifying" into overvalued REITs that find their way into the broadly diversified REIT ETFs like VNQ and REET.
While some might point to the safety inherent in the broadly diversified portfolios held by VNQ and REET, it is also important to keep in mind that Benjamin Graham estimated that an intelligent investor only needed a 10-30 stock portfolio to enjoy sufficient diversification benefits and a study by Frank Reilly and Keith Brown demonstrated that 12-18 stocks diversified across sectors in a portfolio enjoy ~90% of the maximum risk-mitigation benefits that come from diversification. We operate on the conservative end of the spectrum by targeting a portfolio of 25-30 stocks, but by avoiding investing in a massively diversified ETF with hundreds of positions, we are able to enjoy significant market outperformance.
If we had to pick between the two today, we would buy REET simply due to the fact that it offers a higher dividend yield and we like the international exposure at a time when U.S. markets look quite frothy compared to the rest of the world and the U.S. Dollar is facing fresh headwinds, but we still prefer to invest in individual REITs instead.
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This article was written by
Samuel Smith is Vice President at Leonberg Capital and manages the High Yield Investor Seeking Alpha Marketplace Service.
Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point. He is a former Army officer, land development project engineer, and lead investment analyst at Sure Dividend.
Disclosure: I/we have a beneficial long position in the shares of STOR, WPC either through stock ownership, options, or other derivatives. 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.