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VNQ: Worried About Inflation? Buy Hard Assets

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ETFs are a awesome measurement to get automatic, no-brainer diversification. This brings maine to Vanguard Real Estate ETF (NYSEARCA:VNQ), which arsenic shown below, continues to waste and acquisition good beneath its 52-week precocious of $113 achieved successful April of past year. In this article, I item what makes VNQ a coagulated prime for semipermanent income and maturation investors astatine present, truthful let's get started.

vnq etf

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Why VNQ?

VNQ is an speech traded money from Vanguard, arguably nan golden modular of plus managers. Unlike different brokerages, Vanguard does not person shareholders, and is owned by nan investors successful its communal funds. It uses its profits to little fees that it charges shareholders. As 1 would expect, VNQ charges a debased 0.12% disbursal ratio, sitting acold beneath nan 0.45% ETF assemblage median.

Admittedly, VNQ's existent property attraction has been a drawback for nan ETF, arsenic nan marketplace has punished REITs and nan existent property assemblage successful wide for its expected "bond-like" attributes and vulnerability to liking complaint risk. This is reflected by VNQ's price, arsenic it continues to waste and acquisition beneath nan midpoint of its 52-week range.

However, it's important to understand that nan reasoning down liking complaint hikes is owed to inflation, and ostentation is really bully for plus value appreciation complete nan long-term. This whitethorn beryllium particularly existent for VNQ's difficult assets, which dissimilar different assets, thin to clasp up their worth alternatively good and emergence pinch inflation.

This whitethorn beryllium particularly existent successful nan existent era of higher rates, which makes it much costly to build competing assets, making existing assets each nan much valuable.

As shown below, VNQ's apical 10 holdings is comprised of leaders successful their respective industries, including industrial, compartment tower, information center, nett lease, and self-storage giants Prologis (PLD), American Tower (AMT), Equinix (EQIX), Realty Income (O), and Public Storage (PSA).

vnq etf

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All nan much notable is that REIT equilibrium sheets person greatly improved complete nan past 15 years, and nan immense mostly of nan apical 10 holdings transportation solidly finance people in installments ratings ranging from BBB to A. This makes them well-prepared to grip a rising complaint environment, and moreover beryllium nett acquirers of existent property astatine discounted prices, arsenic higher leveraged backstage marketplace players are edged retired owed to higher liking rates.

For each nan economical uncertainty astir rising rates, nan truth remains that nan U.S. system is connected coagulated footing, arsenic supported by a very debased unemployment complaint and coagulated jobs growth, arsenic noted by Hoya Capital successful a report this month:

The Bureau of Labor Statistics reported this week that nan U.S. system added 517k jobs successful January - importantly supra expectations of 185k - a amazingly coagulated study fixed nan continued trickle of firm layoff announcements successful caller weeks. Job maturation was comparatively broad-based successful nan latest NFP study led by gains successful leisure and hospitality, master and business services, and wellness care. ADP information earlier successful nan week came successful beneath estimates, however, pinch backstage payrolls expanding by 106,000 successful January.

Hoya Capital sees a mixed 2023 outlook for REITs, pinch Industrial and Residential REITs being upside standouts, forecasting mid-single digit FFO maturation successful 2023, while portion center, nett lease, and healthcare REIT FFO is expected to beryllium astir flat.

However, a number of factors specified arsenic a soft landing connected liking rates could spur economical maturation future, and REITs' 2022 results propose beardown wide capacity that overachieved expectations, arsenic highlighted successful different caller report:

At nan halfway constituent of different consequential existent property net season, results person modestly exceeded expectations pinch 56% of REITs reporting 2022 Funds From Operations ("FFO") supra their anterior guidance while 3 (8%) missed their guidance.

Importantly for dividend investors, VNQ presently yields a respectable 3.6% and earns an A- dividend grade. Moreover, complete nan trailing 12 months, VNQ's dividend saw a patient 8.8% growth. The decent starting output for VNQ besides sets a somewhat debased barroom for dividend maturation going forward, arsenic it would request to turn by conscionable 6.4% per twelvemonth to execute a respectable ~10% CAGR.

Investor Takeaway

VNQ offers investors a high-quality and divers REIT portfolio, pinch apical 10 holdings comprising of immoderate of nan largest companies successful their respective existent property subsectors. While rising liking rates whitethorn beryllium a headwind, astir of VNQ's apical holdings transportation very beardown equilibrium sheets, enabling them to return advantage of value dislocations successful nan market. Lastly, VNQ pays a respectable dividend yield, mounting it up for perchance beardown semipermanent returns.

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Editor: Naga



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