Navigating Global Real Estate: A Tale of Two ETFs
Introduction to Real Estate ETFs: Global vs. Domestic Focus
In 2025, the Vanguard Global ex-U.S. Real Estate Index Fund ETF, known by its ticker VNQI, has demonstrated a significant lead over its American counterpart, the Vanguard Real Estate Index Fund ETF, or VNQ. VNQI's impressive gain of approximately 21% underscores a notable divergence in the performance of international and domestic real estate markets.
Performance Dynamics: International Outperformance Explained
The superior performance of VNQI can be attributed to several contributing factors. Primarily, non-U.S. real estate markets began with more attractive valuations, providing a stronger foundation for growth. Additionally, a depreciation of the U.S. dollar against other major currencies has acted as a tailwind, boosting the returns of international assets when converted back into dollars. These combined elements have positioned VNQI favorably in the current investment landscape.
Dividend Growth Challenges Amidst Elevated Interest Rates
Both VNQI and VNQ have faced headwinds regarding dividend growth over the past decade. The sustained period of elevated interest rates has impacted the profitability and cash flows of real estate investment trusts (REITs), consequently limiting their ability to significantly increase dividend payouts. This trend is a critical consideration for income-focused investors.
Future Projections: VNQI's Continued Advantage
Looking ahead, analyses suggest that VNQI is likely to maintain its outperformance, potentially exceeding VNQ by an estimated 2% annually. This projection is underpinned by VNQI's currently higher dividend yield and the anticipated continuation of a weaker U.S. dollar. These factors are expected to provide ongoing support for international real estate investments.
Short-Term Outlook for VNQ: Potential for Comparable Returns
Despite the long-term favoritism towards VNQI, VNQ may still deliver competitive returns in the near term. This possibility largely hinges on the Federal Reserve's future policy decisions. Should the Fed proceed with interest rate normalization by late 2026 or early 2027, VNQ could experience a substantial boost, potentially narrowing the performance gap with its international peer.
Key Investment Risks: Interest Rates and Valuation Sensitivities
Investors must be mindful of the inherent risks associated with these ETFs. Fluctuations in interest rates remain a paramount concern, capable of influencing property valuations and financing costs. Furthermore, a significant portion of the projected returns for both funds relies on shifts in valuation multiples and currency exchange rates, making them susceptible to market volatility and economic uncertainties.