What is the Vanguard REIT Index Fund?

What is the Vanguard REIT Index Fund is a question best answered by understanding its origin. Founded in 1975, Vanguard is best known for pioneering the development of passive investing and low-cost index funds. Vanguard’s founder, John C. Bogle, opined that most individuals’ approach toward the stock market was fundamentally broken.

Bogle concluded that active stock selection was largely fruitless in the long run. Rather than trying to pick winners by predicting future stock performance, he began tracking the overall market, believing it would generate higher returns at a lower cost. In doing so, Bogle created the first index fund.

An index fund tracks the performance of a specific benchmark, such as the S&P 500, by holding the same securities in the same proportions as the benchmark. It does not engage in active stock selection or timing. Instead, the fund automatically or “passively” adjusts its holdings through periodic rebalancing to match any changes in the index’s composition. The fund’s portfolio is spread across the numerous securities selected to mimic the benchmark, allowing for easy portfolio diversification.

What is the Vanguard REIT Index Fund? Passive Investing

Bogle’s belief in passive investing proved to be a winner. Despite lacking professional guidance, passive funds have proven superior to active funds in the eyes of many investors. By avoiding the extensive research and analysis required by active funds, passive funds have fewer expenses, reducing client fees. Passive funds have an average expense ratio between 0.06% and 0.18%, compared to 0.71% for active funds.

Passive funds have also managed to outperform their active counterparts. Over the last 30 years, the S&P 500 index has returned an average of 10.4% annually compared to just 3.7% for active equity funds. Passive investing’s low cost and positive track record have convinced many to switch teams. Passive funds are now projected to surpass active funds for total assets under management (AUM) by 2026.

Vanguard quickly grew in clientele as Bogle’s hypothesis proved correct. Today, the financial giant sits as one of the largest investment management firms in the world, with $8.1 trillion in AUM.

What is the Vanguard REIT Index Fund? Prominent and Popular

Over 45 years later, passive funds remain Vanguard’s bread and butter business despite expanding into savings and retirement services. The company manages over 100 index funds, with the Vanguard Real Estate Index Fund (MUTF: VGSLX), or the Vanguard REIT Index Fund, among its most prominent. The fund’s popularity is due to its unique benefits from combining real estate and index funds.

Real estate investment trusts (REITs) provide investors access to a wide range of real estate assets without having to purchase and manage properties themselves directly. REITs raise capital to purchase and manage real estate property or debt. The rent or interest payments produced by the properties are then distributed to investors.

What is the Vanguard REIT Index Fund? A Powerful Risk-Mitigation Tool

Real estate investments are a powerful tool for mitigating portfolio risk. The presence of an underlying tangible property helps safeguard against bankruptcy and credit risk. The house can be sold to recoup costs if a creditor defaults on his or her mortgage. REITs and real estate also possess low correlations with the stock market, meaning they can act as a buffer during periods of economic decline.

Investing in the Vanguard REIT Index Fund goes a step further in diversification and risk mitigation. Instead of buying shares in a single REIT, the fund exposes investors to hundreds of REITs with holdings across dozens of different industries, from retail to healthcare to industrial to residential.

What is the Vanguard REIT Index Fund? An Open-ended Investment Tool

It is important to note that Vanguard offers a REIT index fund and a REIT ETF. While both are passive investment funds, there are some key differences. Index funds are open-ended mutual funds, meaning investors can only buy or sell shares from the firm or its broker.

Open-ended funds can fluctuate significantly in AUM as investors buying and selling shares in the fund proportionally increase or decrease its assets. The fund portfolio’s net asset value (NAV) determines the share price at the end of each trading day. Index funds also tend to have higher expense ratios than ETFs and may require investment minimums (Vanguard’s REIT Index Fund has a $3,000 minimum). In exchange, index fund brokers often provide fund selection and tax advice.

What is the Vanguard REIT Index Fund? It Contracts with a Closed-Ended ETF

Exchange-traded funds, meanwhile, are closed-ended. Their shares are sold through an initial public offering (IPO) when the fund was first formed but traded on exchanges after the IPO. ETFs are also not as firmly tied to the underlying value of their assets, meaning they can trade at a premium or discount to their NAV. ETFs have few fees but can be confusing for retail investors as they provide little, if any, professional guidance.

Overall, the Vanguard REIT Index Fund allows individuals to grow their portfolios by providing diversified exposure to the real estate sector through its varied REIT portfolio. The fund’s array of investments generate steady long-term income while mitigating stock market risk. As a passively managed fund, Vanguard’s REIT index charges lower investment fees than active funds. However, the fund provides some professional advice, helping retail investors in their savings and retirement journey.

Want more? Read our related articles:

The Ultimate Guide to Investing in REITs

Why Do REITs Have High Dividend Payout Ratios?

How Risky are REITs? 

The 13 Types of REIT Stocks and How to Invest in Them 

Investing in REITs: Pros and Cons 

What is a REIT?

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Capison Pang writes for www.dividendinvestor.com and www.stockinvestor.com.