VNQ ETF

Real estate has done better than other sectors in the past year, with VNQ achieving a total return of 26%, surpassing the tech-focused S&P 500 and the Dow Jones index. VNQ's strong performance is mainly due to its negative relationship with decreasing interest rates, which the market has already expected and adjusted for. Real Estate Investment Trusts (REITs) are particularly affected by interest rates because of their significant debt and dependence on tenant occupancy and rent, which can be influenced by rising rates.

Putting your money into an exchange-traded fund (ETF) that stands to gain from interest rate cuts could be a smart decision at this time, especially since more cuts may be coming soon. JPMorgan Chase predicts that there might be another rate cut in December, with additional cuts expected each quarter next year.

U.S. REITs have done much better than their global counterparts, thanks to rising valuation multiples, a stronger dollar, and higher real GDP growth. They have gained from increased real GDP growth, which is supported by a growing population and improved productivity, while international REITs have struggled with slower growth and demographic challenges in some areas. VNQI has much lower valuation multiples compared to VNQ, even though their return on equity is similar, indicating that international real estate may be undervalued.

In the last 15 years, better returns have been achieved through strategies focused on multiples and earnings rather than dividends. REITs tend to do poorly when interest rates drop, which raises worries about the potential costs of investing in VNQ. Additionally, VNQ is trading at a price-to-book ratio without any safety margin, making its investment worthiness questionable.

The REIT sector has recently outperformed the SP500 by a large margin. However, VNQ's most recent dividend payouts suggest its price advancements have yet to catch up with earnings growth. VNQ's latest quarterly dividend distribution made in October translates into a 50% YOY growth when returned capital is excluded and 27% growth on a TTM basis.

Learn which two Vanguard ETFs provide retirees with a suitable mix of growth and income.

Vanguard Real Estate Index ETF (VNQ) is one of the best ways to gain instant diverse exposure to the real estate sector. Even though the dividend yield of 3.6% is a bit unexciting compared to its underlying holdings, it remains stable and supported by holdings. However, the dividend has lacked meaningful growth. The Fed has cut interest rates by 0.5%. This should improve the strength of underlying holdings.

REITs extended their winning streak into August with a +2.11% average total return and are now +6.97% thus far in 2024. Large cap (+5.27%), mid-cap (+3.51%) and small cap REITs (+0.84%) averaged gains in August. Micro caps (-3.03%), however, finished August in the red. 68.39% of REIT securities had a positive total return in August.

VNQ, ITB, XLY, IWM and GLD are included in this Analyst Blog.