This ETF Shows There's Merit in International Real Estate

Investors looking to add some spice and international diversity to U.S.-heavy real estate exposure have some exchange traded funds to consider with the Vanguard Global ex-U.S. Real Estate ETF VNQI being one of the best of the bunch.

What Happened

With analysts mostly tepid on domestic real estate equities heading into 2020, VNQI, which follows the S&P Global ex-U.S. Property Index, could be a solid idea for investors looking to refresh income-oriented sectors in their portfolios.

Plus, like nearly all Vanguard ETFs, VNQI is one of the least expensive funds in its category. It charges 0.12% per year, or $12 on a $10,000 investment.

“It also has a durable edge over peers in the form of its lowest-in-class expense ratio,” Morningstar said in a recent note. “That said, the fact that its benchmark omits U.S. securities and includes emerging-markets ones makes it a misfit in a Morningstar Category dominated by more globally oriented peers. Also, its emerging-markets exposure has translated to significantly higher risk than most funds in the category.”

Why It's Important

Of the 690 stocks residing in VNQI, 20.60% are emerging markets names. That could be a boon for the fund in 2020 as many real estate names in developing economies boast higher yields and lower valuations than their domestic counterparts.

Additionally, VNQI is not a dedicated REIT fund, but that doesn't hamper its yield, which is 50 basis points above the equivalent Vanguard domestic real estate ETF.

“REITs make up about 47% of the fund's portfolio. REITs must distribute most of their taxable income to shareholders,” said Morningstar. “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.”

What's Next

Beyond the emerging markets exposure, VNQI devotes about three-quarters of its weight to Europe and developed Asia-Pacific, regions that are chock full of markets with compelling valuations relative to the U.S.

Fortunately, the outlook for interest rates in markets such as the Eurozone and Japan doesn't call for any near-term hikes.

Morningstar has a Bronze rating on VNQI.

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