REIT ETFs: One of Few Tools to Outsmart Sky-High Inflation

Inflation is ubiquitous. Inflation bites and there seems no light at the end of the tunnel as Fed’s ability to tame consumer price galloping is limited by everyone’s fear of playing with the odds of recession. Although it’s hard to find a foolproof defensive investment, one sector still outpaces the average price growth, and the sector is represented by the real estate investment. Thus, as inflationary pressures continue to mount in 2022, many investors are rethinking their investing strategy to include so-called hard assets that have tangible value. We are going to discuss our approach to REIT investing.

The Vanguard Real Estate ETF (VNQ) and the iShares Global REIT ETF (REET) are two low-cost REIT ETFs offering broadly diversified exposure to the highly acclaimed sector. A $81 billion leader in the real estate space, this REIT ETF from Vanguard is perhaps the most popular way to invest in the sector without going out and buying physical property. It's also one of the simplest and most diversified ways to do so, with a portfolio of nearly 170 holdings entailing all sorts of properties from warehouses to shopping malls to hospitals. VNQ is also remarkably cheap, as is typical of Vanguard index funds, with an expense ratio of just 0.12%, or $12 annually in fees on every $10,000 invested. And with a yield that is more than twice the S&P 500 at present, it also shows the powerful income potential of REITs.

While both ETFs charge very low fees to investors, VNQ gets the edge here with its 0.12% expense ratio compared to REET's 0.14% expense ratio. To put this in perspective, on a $100,000 investment, VNQ saves investors $20 per year. This is not materially significant, but it would slightly tip the balance in VNQ's favor, all other factors being equal.

VNQ has significant exposure to residential, retail, and industrial REITs, with moderate exposure to health care and office REITs and a small allocation to hospitality REITs and real estate services businesses. It also has a massive allocation to specialized REITs.

In contrast, REET has even higher exposure to industrial, residential, and office REITs with virtually identical exposure to health care REITs and very similar exposure to hospitality REITs. The company also has much larger exposure to diversified REITs and much less exposure to specialized REITs.

REET clearly seems to place a higher premium on data centers with its higher allocation to EQIX and inclusion of DLR on its top 5 list. REET's higher allocation to O also reflects its heavier bet on retail real estate. Meanwhile, VNQ seems to place a higher premium on communications infrastructure, with tower and fiber businesses AMT and CCI occupying its number 2 and 3 spots.

It is also worth noting that REET holds 373 positions in its portfolio whereas VNQ only has 164 stocks in its portfolio. This reflects the simple fact that REET targets a global portfolio of REITs whereas VNQ focuses on the U.S. market.