Want Decades of Passive Income? Buy This ETF and Hold It Forever.

There are some excellent opportunities in the stock market for long-term investors right now, and that's especially true in the world of dividend stocks.

One area of the market that could be an excellent place to look for passive income right now is real estate. Real estate investment trusts, or REITs, have underperformed the market for the past several years, and the primary reason is the interest rate environment.

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Generally speaking, REITs tend to outperform the market in falling-rate environments and underperform when rates are rising. There are a few reasons for this. For one thing, REITs tend to rely significantly on borrowed money to fund their growth, and rising rates make this more expensive. Additionally, and more importantly, commercial property values are tied to the prevailing interest rate environment, so the properties REITs own become less valuable when rates are high.

In short, REITs are some of the most rate-sensitive stocks in the market. And while they are designed to be excellent long-term income investments, buying the Vanguard Real Estate ETF (NYSEMKT: VNQ) while rates are still elevated could be an excellent portfolio move.

What is the Vanguard Real Estate ETF?

The Vanguard Real Estate ETF is an index fund that tracks an index of property-owning real estate investment trusts, or REITs (pronounced "reets"). These are companies that own office buildings, apartments, warehouses, storage facilities, and pretty much any other type of commercial real estate you can think of.

As of the latest data, there are 158 different investments in the fund's portfolio. It is a weighted index, which means that larger REITs account for more of the fund's assets. The largest holding is industrial real estate giant Prologis (NYSE: PLD), which makes up about 6.5% of the ETF's assets. Other top holdings include communications infrastructure REIT American Tower (NYSE: AMT), data center REIT Equinix (NASDAQ: EQIX), and healthcare real estate leader Welltower (NYSE: WELL).

One fact to know is that in order to be classified as a REIT, a company is required to pay out at least 90% of its taxable income as dividends. So, REITs tend to be excellent income stocks, and this ETF has a 3.8% annualized dividend yield as of this writing. Between the income and growth potential over time (remember, real estate tends to go up in value), this can be an excellent total return investment.

The Vanguard Real Estate ETF has a low 0.12% expense ratio, which means that for every $1,000 in assets you have in the fund, $1.20 will go to investment fees each year. To be clear, this isn't a fee you have to pay, but it will be reflected in the ETF's performance over time. And this is on the very low end for a sector-specific ETF like this.

A great long-term compounder

As mentioned, REITs have underperformed the market in recent years, but it's important to point out that over the long term, REITs have a solid track record of performing as well or even better than the S&P 500. In fact, over the 20-year period through 2023, REITs as a group delivered 10.4% annualized total returns, compared with 9.7% for the S&P 500.

Not only did REITs outperform the S&P 500 over the past couple of decades, but they've done so with less general volatility. The bottom line is that regardless of what stage of your investing career you're in, the Vanguard Real Estate ETF could be an excellent choice for growth, income, and peace of mind.

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Matt Frankel has positions in Prologis and Vanguard Real Estate ETF. The Motley Fool has positions in and recommends American Tower, Equinix, Prologis, and Vanguard Real Estate ETF. The Motley Fool recommends the following options: long January 2026 $180 calls on American Tower, long January 2026 $90 calls on Prologis, and short January 2026 $185 calls on American Tower. The Motley Fool has a disclosure policy.