The Smartest Vanguard ETF to Buy With $1,000 Right Now
Key Points
Real estate investments have underperformed in recent years, but that could change soon.
If interest rates fall, right now could be a smart time to buy real estate ETFs.
With the right strategy, this fund could help you earn hundreds of thousands of dollars.
- 10 stocks we like better than Vanguard Real Estate ETF ›
Investing in exchange-traded funds (ETFs) enables you to invest in dozens or even hundreds of stocks simultaneously, helping to mitigate risk while building a well-diversified portfolio.
Vanguard offers dozens of quality ETFs spanning all areas of the market, but there's a hidden gem that could be a particularly attractive buy right now: the Vanguard Real Estate ETF (NYSEMKT: VNQ).
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This fund contains 155 holdings from all corners of the real estate market, ranging from real estate operating and development stocks to a wide variety of real estate investment trusts (REITs) across many different industries. Here's why it may be on the verge of significant growth.
The tide is shifting for real estate
Compared to many other investments, real estate ETFs appear to underperform. The Vanguard Real Estate ETF has earned total returns of just 25% over the past 10 years, compared to the S&P 500's staggering 235% total returns in that time.
But there's a big reason that might change soon: falling interest rates.
Higher interest rates tend to be a downside for the real estate industry, as they make borrowing less appealing. These ETFs can also carry more risk than typically conservative investments like Treasury bills. During periods with high interest rates, fewer investors are willing to take on that risk.
Right now could be a smart time to buy, however, as interest rates are expected to begin falling in the coming months. In his speech last month, Federal Reserve Chairman Jerome Powell strongly implied that rate cuts could be coming as soon as September, citing a shaky job market and general economic uncertainty.
While interest rates haven't changed yet, a rate cut could be announced after the Fed's next meeting on Sept. 16-17. If rates do fall, it could encourage more growth within the real estate industry.
Is a real estate ETF right for you?
Real estate funds are different than many other sectors of the market, but they have a few distinct advantages and disadvantages:
- Advantage: Many real estate ETFs pay dividends, which can provide a source of passive income. The Vanguard Real Estate ETF's most recent dividend payment was around $0.87 per share, and by investing consistently over decades, you could generate thousands of dollars per year in dividends from just one ETF.
- Disadvantage: Despite higher dividends, many of these funds have lower growth potential compared to other investments. The Vanguard Real Estate ETF has earned an average rate of return of around 6% per year over the last decade, while the Vanguard Growth ETF, for example, earned an average return of over 17% per year in that time.
- Advantage: Real estate ETFs have fantastic long-term potential, and they can also experience less short-term volatility. While the real estate industry is more sensitive to interest rate fluctuations, these funds generally don't experience the same stomach-churning ups and downs as, say, tech-focused ETFs.
Another perk of the Vanguard Real Estate ETF, in particular, is its low expense ratio of 0.13%. This means you'll pay $13 per year in fees for every $10,000 in your account, and with some similar funds charging fees of 1% or more, this could save you thousands of dollars over time.
How much could you earn with this ETF?
Despite this fund's lower earning potential compared to growth ETFs, it's still possible to earn substantial returns over time. Since its launch in 2004, the Vanguard Real Estate ETF has earned an average annual return of 7.55%.
If you were to invest $1,000 right now while earning a 7.55% average annual return going forward, that money would grow into nearly $9,000 if left to grow for around three decades. But if you really want to supercharge your earnings, small monthly contributions could help you earn exponentially more.
Say you begin investing $200 per month, and you might earn an average return of either 6%, 7%, or 8% per year. Here's roughly what you could accumulate over time, depending on how many years you invest:
| Number of Years | Total Portfolio Value: 6% Avg. Annual Return | Total Portfolio Value: 7% Avg. Annual Return | Total Portfolio Value: 8% Avg. Annual Return |
|---|---|---|---|
| 20 | $88,000 | $98,000 | $110,000 |
| 25 | $132,000 | $152,000 | $175,000 |
| 30 | $190,000 | $227,000 | $272,000 |
| 35 | $267,000 | $332,000 | $414,000 |
Data source: author's calculations via investor.gov.
Keep in mind, too, that these earnings are in addition to any dividend payments you're receiving. With enough time and consistency, even relatively small monthly contributions could turn into hundreds of thousands of dollars.
The Vanguard Real Estate ETF can be a particularly smart investment when interest rates are falling, and given the Fed's recent indication that rate cuts could be on the horizon, this fund could be poised for growth. With a long-term outlook, you could earn more than you might think.
Should you invest $1,000 in Vanguard Real Estate ETF right now?
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Katie Brockman has positions in Vanguard Index Funds-Vanguard Growth ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Growth ETF and Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
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