What I'm Watching With Vanguard Real Estate Index Fund ETF Shares to See If They Beat the Market

Just over three dozen exchange-traded funds (ETFs) provide dedicated exposure to REITs, but in terms of size, it's the Vanguard Real Estate ETF (NYSEMKT: VNQ) and everyone else.

As of March 14, the king of real estate ETFs has $35.6 billion in assets under management (AUM), more than triple that of its nearest competitor. That is to say, this is the bellwether of bellwethers among real estate ETFs.

These are factors to watch this year with the Vanguard Real Estate ETF. Image source: Getty Images.

That status shouldn't be ignored. Nor should the fact that the real estate sector hasn't done much of anything in recent years. Over the past half-decade, this Vanguard ETF has been basically flat while the S&P 500 is up nearly 69%. But positive change is afoot as an investor shift to defensive sectors has the fund up 5% year to date, while the S&P 500 is down about 2%.

That's a good start to the year, but those laurels can't be rested on. If the real estate sector catches a few breaks over the remainder of 2026, this Vanguard fund could build on its recent momentum. Here's what I'm keeping an eye on to see if that happens.

AI, interest rates are big deals

Real estate stocks, including plenty of the 146 residing in this ETF, are notoriously sensitive to changes in interest rates. One reason for that phenomenon is that publicly traded REITs are viewed as bond proxies, so when rates decline, the often above-average dividend yields offered by funds such as this Vanguard ETF become more appealing.

Regarding interest rates, investors should note that rate fluctuations don't affect all REIT groups uniformly. Historically, the real estate segments that benefit the most from Federal Reserve easing are data center, healthcare, and telecom REITs. Good news: This Vanguard ETF allocates 35.5% of its weight to those groups.

Speaking of data centers, an almost 10% weight to those REITs implies this ETF has some leverage to the artificial intelligence (AI) trade, and it's another example of good news. Actually, it's a double dose of positive news.

First, data center demand remains strong and is expected to remain so throughout this year. Second, in some circles, AI is seen as a potential headwind to the commercial office industry. Perhaps those fears are overblown, but if not, investors holding this Vanguard ETF can sleep at night because the fund has a mere 2.3% weight to office REITs.

Keep an eye on those dividends

With a trailing-12-month yield of 3.63%, this ETF lives up to the income billing often assigned to the real estate sector. That doesn't mean investors can simply collect checks without conducting a closer examination. Again, this is a case of double good news.

Last year, 73 domestic REITs, including many held by the Vanguard Real Estate ETF, boosted payouts. More importantly, the fundamentals are in place for continued dividend growth, as REIT funds from operations (FFO) are solid and interest expense and leverage ratios are low. I won't be taking my eye off these issues, but it is encouraging to know most of this fund's holdings are on a firm dividend footing.

The Vanguard ETF's expense ratio is 0.13% annually, costing investors $13 on a $10,000 stake.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.