Carey ( WPC), STORE Capital ( STOR), National Retail Properties ( NNN), EPR Properties ( EPR), Spirit Realty Capital ( SRC), and Agree Realty ( ADC) that offer strong recession resistance, safe yields ranging from ~4.5% to nearly 7%, and annualized payout growth generally in the mid-single digits. Investment grade triple net lease REITs like Realty Income ( O), W.Instead of buying VNQ in the current environment, passive income seekers would be better served building a portfolio of individual REITs that meet the aforementioned qualities. After the recent market sell-off, there are plenty of high yielding REITs that meet these qualifications. While this may sound like pie in the sky wishing, it actually is not. With recession risk on the rise, it makes sense to us to focus on the higher quality REITs that also enjoy some defensive characteristics and trade at reasonable - if not attractive - valuations with lucrative and sustainable dividend yields. This leads to "diworsification" whereby diversification is pursued to an extreme extent in which the risk-reward profile is hurt, as incremental positions added to the portfolio do not reduce the overall risk profile of the portfolio to the same degree that they reduce its total return potential. The third reason is that by buying VNQ, you are not only signing up for an unimpressive passive income stream, but you are also blindly buying all of the REITs in the index, regardless of valuation, management quality, or forward prospects. Again, why - when we are very likely on the threshold of a recession - invest in a risky and volatile equity security like VNQ when you can get far safer investment grade corporate bonds that offer literally the same yield? ![]() Secondly, its 3.11% dividend yield is pretty paltry when viewed as a passive income source. ![]() With interest rates widely expected to rise in the coming months, it looks like share price downside could be in order for VNQ. The main reasons why we are not bullish on VNQ at the moment are three-fold.įirst and foremost, as a yield instrument, it is not particularly attractive with only a 23-basis point spread between its dividend yield and long-term U.S. While RQI might outperform VNQ on a pre-fee basis, this enormous difference in fees places an enormous hurdle for RQI to overcome if it actually wants to generate alpha for investors net of fees over time. The same amount invested in RQI at a similar assumed total return CAGR would result in a staggering $546,097.73 cost of fees. To illustrate the difference in costs, $100,000 invested in VNQ for a 30-year period at a 9% total return CAGR would result in a $43,127.48 cost of fees. VNQ enjoys narrow bid-ask spreads and charges investors a very low fee to manage their funds via its passive algorithm.įor perspective, one of the most popular actively managed REIT funds - the Cohen & Steers Quality Income Realty Fund ( RQI) - charges a lofty 1.91% expense ratio. On top of that, its paltry 0.12% expense ratio and significant liquidity due to having $73.29 billion in assets under management as of this writing mean that investors can trade in and out of, hold, or even trade options on this fund with little frictional loss. As a result, "know nothing investors" - to borrow a term from Charlie Munger - get exposure to large-, mid-, and small-cap REITs through the fund, giving them a well-balanced portfolio. commercial and residential real estate via over 160 publicly traded REITs. ![]() Reasons To Buy VNQīefore we discuss the downsides of VNQ, we need to first admit that there are many good reasons to invest in VNQ, including its vastly diversified and completely passive exposure to U.S. In this article, we share some REITs that we believe offer superior risk-reward relative to VNQ. However, there are several reasons why VNQ is a less-than-ideal method for real estate investing. The Vanguard Real Estate ETF ( NYSEARCA: VNQ) is a highly popular ETF for investors looking for passive income from real estate.
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