If you’re looking for an exchange-traded fund (ETF) that will provide you with dividend income, you can take one of two broad routes: you can buy a dividend-focused ETF, or you can buy a dividend-focused ETF. dividend-oriented sector. This may sound like doublespeak, but it is not.
That’s why investors with $1,000 or less will want to take a look at Vanguard Real Estate ETF (NYSEMKT:VNQ) Today.
A Quick Look at the Vanguard Real Estate ETF
Vanguard Real Estate ETF is not a particularly attractive exchange-traded fund. As the name suggests, it is intended to track the real estate investment trust (REIT) industry in a fairly broad way. It’s quite cheap to own, with an expense ratio of just 0.12%. And its dividend yield is a generous 4.3%, which compares very favorably to the yield of S&P500 index, which is currently barely 1.3%.
Real estate investment trusts are specifically designed to pass income to investors in a tax-efficient manner. As long as a REIT pays out 90% of its taxable income, it does not pay corporate income tax. The goal of a REIT is to give individual investors access to institutional-grade rental properties, such as office buildings, apartment buildings, and hospitals.
The downside is that individual investors must treat dividends as regular income, subject to higher taxes than regular dividend payments. So the Vanguard Real Estate ETF is, by design, focused on stocks that aim to provide income to investors – therefore a relatively high yield.
There’s a small problem here, though: Many sector ETFs end up with a few stocks that make up a disproportionate share of the fund’s assets. However, the Vanguard Real Estate ETF tracks the MSCI US Investable Market Real Estate 25/50 Index, which is specifically designed to improve portfolio diversification. No more than 25% of the ETF may be invested in a single REIT, and the sum of all REITs with a weighting of 5% or greater cannot represent more than 50% of the ETF’s portfolio.
This is a fancy way of saying that the ETF is designed so that the biggest stocks are not shockingly overweighted. For example, Prologis is the largest security, with approximately 7.6% of assets, while this same security represents 10.3% of SPDR Dow Jones REIT ETF. If you value diversification, the Vanguard Real Estate ETF is designed for you.
Why Buy an Index REIT Today?
While the dividend yield is an obvious draw for investors here, the bigger picture is that the Vanguard Real Estate ETF is lagging the market. As the chart shows, this ETF fell along with the broader market at the start of the coronavirus pandemic. But it did not recover at the same time as the market. This is largely due to rising interest rates, which is a general hurdle for REITs because it increases operating costs.
REITs use debt to finance property acquisitions. So, higher rates mean higher costs. But there is an offsetting factor here that investors need to consider.
Real estate markets eventually adapt to rate changes because buyers will stop acquiring new properties if it doesn’t make financial sense to purchase them. Sellers therefore end up lowering their asking prices, which improves the profitability of acquisitions for buyers. It may take a while, but history suggests that housing markets will eventually adjust.
And that’s the buying opportunity: You’re actually buying a diverse, diverse portfolio of REITs while the industry is in flux. This has investors worried and the index is lagging.
Buying the Vanguard Real Estate ETF today is a bit of a contrarian play. Note in the chart that the yield spread between the S&P 500 Index and this ETF is near the highest levels of the last decade, showing just how unloved the REIT sector is right now .
If you can bear to face the crowds…
Here’s the thing: To buy a Vanguard Real Estate ETF, you must first be able to take a contrarian position and, second, believe that REITs will eventually return to favor with investors. This is not something every investor will want to sign up for. However, you will be paid very well for waiting with an investment specifically designed to pay you dividends. This is an attractive proposition if you can stomach some short-term uncertainty.
Should you invest $1,000 in the Vanguard Real Estate ETF right now?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends specialized funds Prologis and Vanguard – Vanguard Real Estate ETF. The Motley Fool recommends the following options: Long $90 January 2026 calls on Prologis. The Motley Fool has a disclosure policy.
1 Simple Dividend ETF to Buy Right Now for Under $1,000 was originally published by The Motley Fool
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