Mon. Dec 4th, 2023

There are a few characteristics that make an exchange-traded fund, or ETF, a good candidate for a retirement account investment. An above-average dividend is one. It’s also nice to have long-term growth potential, as well as a low-cost structure.

One ETF that checks all the boxes is the Vanguard Real Estate ETF (NYSEMKT:VNQ). This index fund deserves to be on the radar of any investor who wants to build a portfolio of passive investments with the potential to produce excellent long-term performance.

Jar of money labeled retirement.

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What is the Vanguard Real Estate ETF?

The Vanguard Real Estate ETF is an index fund that owns stocks of real estate investment trusts, or REITs. It tracks an index that invests in 176 different real estate stocks, weighted by market cap. The Vanguard Real Estate ETF owns shares of American Tower, Prologis, Digital Realty Trust, and Public Storage, to name a few top holdings.

If you aren’t familiar, a REIT is a special type of company whose primary business involves owning, developing, or managing real estate assets. In order to qualify as a REIT, a company needs to meet several requirements, such as investing at least 75% of its assets and deriving 75% of its income from real estate. Most significantly for investors, REITs are required to distribute a minimum of 90% of their taxable income to investors.

If a REIT meets this requirement, it gets a pretty big benefit — no corporate income tax whatsoever. The profits of most dividend-paying companies are effectively taxed twice. Companies pay corporate tax on their profits, and investors pay tax on dividends.

Because they have to distribute so much of their income, REITs tend to pay higher dividends than the average company. The Vanguard Real Estate ETF has a dividend yield of 3.9%, more than twice the yield of the Vanguard S&P 500 ETF.

Strong return potential

The main reason I love REITs as a retirement investment is that they make great total return stocks. Also, the high dividends perfectly fit the tax advantages of IRAs and other retirement accounts.

Real estate can not only create an excellent income stream, but can also produce excellent stock price appreciation over time. Property values tend to rise over time, and most REITs use some degree of leverage, which helps amplify this effect. In addition, REITs use several other strategies to create value, such as developing new properties from the ground up, selling properties and reinvesting capital more efficiently, etc.

Since the Vanguard Real Estate ETF’s inception in 2010, the index fund has produced a 14.9% annualized return for investors. This isn’t just an income investment — it can grow your portfolio just as fast (or faster) than other stock index funds.


The Vanguard Real Estate ETF can produce excellent long-term results in your retirement account and eventually create a nice income stream to help fund your retirement. It’s also important to point out the fund is cheap. Like other Vanguard index funds, the Vanguard Real Estate ETF has a rock-bottom fee structure (known as an expense ratio in ETF terms).

The fund’s expense ratio is 0.12%, which means that for every $10,000 you have invested, your annual investment expenses are just $12. As the fund generates income and growth, you’ll get to keep the vast majority of the gains.

The Foolish bottom line

The Vanguard Real Estate ETF checks all of the boxes for an excellent retirement account investment. It has a track record of strong long-term returns, pays an above-average dividend yield, and has an extremely low-cost structure. Investors looking for ETFs for their IRAs that they can buy for years of income and growth should put it on their radar.

By senior