ETF Specialist

An ETF Pick for Those Looking to Tap Into Foreign Real Estate

Ben Johnson, CFA

 Vanguard Global ex-U.S. Real Estate ETF (VNQI) is a sound choice for broadly diversified, low-cost exposure to foreign real estate securities. This fund tracks a broadly diversified, market-cap-weighted index that is representative of the opportunity set available to investors in this market segment. It also has a durable edge over peers in the form of its lowest-in-class expense ratio. That said, the fact that its benchmark omits U.S. securities and includes emerging-markets ones make it a misfit in a field dominated by more globally oriented peers. Also, its emerging-markets exposure has translated to significantly higher risk than most funds in the global real estate Morningstar Category. It earns a Morningstar Analyst Rating of Bronze.

REITs make up about 45% of the fund's portfolio. REITs must distribute the majority of their taxable income to shareholders. Its remaining holdings are engaged in a diverse array of real estate-related activities and include real estate operating companies, real estate developers, and non-REIT property managers. Developers construct buildings on new or underutilized land. Unlike REITs, which are restricted from building in some nations, developers can take on more-speculative projects. Developers are more volatile than REITs because their cash flows are less predictable, and payout ratios are generally much lower.

Ben Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.