Income · Stocks to Consider and Updates

Vanguard REIT Fund – Update

Over the past 52-weeks, the Vanguard REIT Exchange Traded Fund (NYSE: VNQ – $84.40) has had a total return of about 12.5%, thanks to the generous $3.95 dividend, yielding 4.8% on a trailing twelve-month basis. Since entering the income portfolio in February of 2014, the shares have advanced 22.2% and over those nearly four years, provided an annual total return of some 10%, including dividends and capital gains distributions. It should be noted that REITs, on average, have not kept pace with the broader stock market this year, and certainly have lagged many other, more dynamic, market groups. Of note, a rising interest rate environment can negatively impact all real estate operators, as they depend on mortgage and bank financing to conduct business. Too, elevated rates (and competition from more attractive fixed income markets) tend to exert downward pressure on almost all equities, and can specifically put a damper on income-oriented investments, such as real estate trusts. On a positive note, the Federal Reserve seems to be taking a gradual approach, and has been making only incremental changes to its monetary policy.

       Specifically, the Vanguard REIT ETF employs an indexing investment approach designed to track the performance of the MSCI US REIT Index composed of stocks of publicly traded equity real estate investment trusts. Currently the fund holds positions in 150 REITs, of which the top ten make up nearly 35% of the total.

        By industry, VNQ is over-weighted in retail properties and as well as specialized and residential real estate holdings.

       The fund is passively managed and charges investors a very economical 0.12% expense fee. REIT shares are primarily income producing investments and are best held for total return potential, as the ability to deliver large capital gains is often secondary to dividend and capital gains payouts. While not an investment that will provide headline advances, a 5% allocation of the shares of risk-averse VNQ can continue to be held for further returns in a well-diversified income account.


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