Why Vanguard Real Estate Index Fund is One of the Best of its Kind

Key Morningstar Metrics for Vanguard Real Estate Index Fund

• Morningstar Medalist Rating: Gold
• Process Pillar: High
• People Pillar: Above Average
• Parent Pillar: High

Vanguard Real Estate Index VGSLX and Vanguard Real Estate ETF VNQ are among the best U.S. real estate funds available.

The strategy charges very little for a broad portfolio that accurately tracks the U.S. real estate market, spreads its bets over dozens of holdings, and follows the market’s collective wisdom about their individual valuations and prospects by market-cap weighting. The strategy’s efficacy affirms a Morningstar Medalist Rating of Gold for the admiral, institutional, and exchange-traded share classes and warrants an upgrade for the pricier investor share class to Gold from Silver.

This fund fully replicates the MSCI US Investable Market Real Estate 25/50 Index, which mostly consists of equity real estate investment trusts. Equity REITs own and operate income-producing real estate, so this portfolio is a good proxy for the U.S. real estate market. Some real estate management companies squeeze into the index as well, but they tend to represent less than 5% of the portfolio.

The fund weights securities that make the index’s cut by market cap, a cost-efficient tack that channels the market’s collective view on the relative value of each holding. Most portfolio additions attract significant investor attention, so they tend to be priced accurately. Market-cap weighting also helps mitigate turnover and the related transaction costs. The fund’s benchmark also employs buffers designed explicitly to limit those costs.

Market-cap-weighted sector index funds can be concentrated. This index’s broad reach and constraints keep it out of trouble. The top 10 holdings accounted for between 36% and 50% of the portfolio over the past five years; its average peer ranged from 45% to 65%. Specialized REITs form 28% of the portfolio, but their variety alleviates concentration