The stock market looks hot in many places right now but one sector that has been relatively underwhelming is real estate. Since the start of the year, the Vanguard Real Estate Index Fund (NYSE Arca:VNQ) has declined by 2% while the S&P 500 has risen by nearly 11%.
But if interest rates come down this year, then the fund could start to pick up steam. A big reason investors invest in real estate investment trusts (REITs) is that they often offer high yields and can be excellent sources of recurring income. But with interest rates being high these days, investors have been able to secure strong returns (e.g. through the bond market) without the need for buying equities and relying on REITs. If rates come down, however, that could change, and REITs could become more popular options for income investors again.
The Vanguard Real Estate Index Fund provides investors with a yield of 4% and holds more than 150 stocks, making for a fairly diverse investment. Retail, industrial, and data center REITs are the largest sectors it has exposure to. Some of the more notable REITs in its portfolio include Prologis (NYSE:PLD), Realty Income (NYSE:O), and Public Storage (NYSE:PSA), all making up more than 2% of the ETF’s overall weight.
While the fund hasn’t normally outperformed the S&P 500, it can make for a good dividend investment for the long haul. Over the past 10 years, its total returns (which include dividends) have totaled 84%. Although the ETF is trading near its 52-week high, it has been an underperformer of late, and that could change once interest rates start to come down.
