XLRE vs VNQI: Domestic Large-Cap Stability or International 5% Yield

The State Street Real Estate Select Sector SPDR ETF (NYSEMKT:XLRE) concentrates on domestic S&P 500 holdings, while the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ:VNQI) provides broad international exposure with a higher yield.

Investors seeking real estate exposure must decide between domestic stability and international diversification. The State Street fund targets the U.S. market, while the Vanguard ETF reaches across more than 30 countries to find opportunities outside American borders, allowing investors to partition their real estate holdings by geography and economic cycles.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The State Street fund is the more affordable option, sporting an expense ratio of 0.08% compared to the 0.12% charged by the Vanguard ETF. While both are relatively low-cost, the 1.65-percentage-point yield gap makes the Vanguard fund potentially more attractive for those prioritizing current income.

Performance & risk comparison

What's inside

The State Street Real Estate Select Sector SPDR ETF maintains a pure-play focus with 100% of its assets in the real estate sector. It holds 30 positions, primarily large-cap U.S. firms. Its largest positions include Welltower at 11.6%, Prologis at 8.2%, and Equinix at 6.4%. The fund tracks the Real Estate Select Sector Index and is designed for tactical domestic allocation. State Street Real Estate Select Sector SPDR ETF launched in 2015 and has paid $1.44 per share over the trailing 12 months, which on its recent ~$41.99 share price works out to a 3.4% yield.

The Vanguard Global ex-U.S. Real Estate ETF provides broader diversification with 729 holdings, which helps mitigate the idiosyncratic risk of any single property market. Its sector allocation is predominantly real estate at 98%, with minor 1% weights in industrials and consumer cyclical. Its largest positions include Goodman Group at 3.85%, Mitsubishi Estate at 2.76%, and Mitsui Fudosan at 2.54%. This fund tracks the S&P Global ex-U.S. Property Index to mirror non-U.S. real estate investment trusts and operating entities. Vanguard Global ex-U.S. Real Estate ETF launched in 2010 and has paid $2.16 per share over the trailing 12 months, which on its recent ~$42.39 share price works out to a 5.1% yield.

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Which looks like the better buy

Choosing between VNQI and XLRE largely comes down to whether you want to add domestic or international real estate to your existing portfolio. XLRE gives you instant access to a handful of large-cap domestic real estate companies for a relatively low expense ratio. With just 30 holdings, it's relatively concentrated, but its top three holdings represent compelling long-term trends: healthcare facilities and nursing homes (Welltower), warehouses and distribution centers (Prologis), and digital infrastructure and data centers (Equinix). XLRE has outperformed VNQI on a total return basis over the short and medium terms, but what's more important is what it can offer in the future. At a high level, I see those three investment themes performing well over the next decade or so.

VNQI offers far more holdings for investors under one ticker, lending a good deal of diversification. Moreover, investing in VNQI means holding more than 700 real estate companies that are headquartered outside the U.S., which could help you avoid the effects of domestic economic cycles and interest rate hikes. It also offers a significantly higher dividend yield than XLRE, which could appeal to income investors. But investing in international real estate comes with different challenges, including the effects of geopolitical tension, foreign currency fluctuations, and local regulations.

Investors set on adding international exposure or chasing high dividend yields may be well served with VNQI, but if you're just starting to add real estate to your portfolio, I would start with XLRE.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equinix, Goodman Group, and Prologis. The Motley Fool has a disclosure policy.