It receives a Process rating downgrade to Above Average from High because indexing has not worked as well in the real estate category as in broader segments of the stock market.
This benchmark selects stocks from the MSCI US Investable Market Index, a broad index that spans the complete US stock market. It targets stocks classified under the real estate sector. This includes equity REITs as well as real estate management and development firms. The fund excludes mortgage and hybrid REITs, whose revenue partly comes from real estate lending.
The index weights stocks by market capitalization, which is a cost-efficient approach that harnesses the market’s collective wisdom to size its positions. Market-cap weighting also curbs turnover and the accompanying trading costs. The fund’s annual turnover ratio ranked in the category’s best decile in four of the past five calendar years.
Index constraints keep the portfolio diversified. No holding may exceed 22.5% of assets at each quarterly rebalance, and constituents that weigh more than 4.5% must collectively represent less than 45.0% of the portfolio. These rules have not been called into action owing to the fund’s broad reach but serve as an effective safeguard.
More than 90% of this portfolio comprises REITs; real estate management and development firms like CBRE Group round out the rest. REITs own and operate real estate that generates income, mostly in the form of rents. They are more bond-like than most equities because cash flows from rent collection are normally fixed, and property values are sensitive to interest-rate fluctuations. REITs are also required to return at least 90% of their taxable income to shareholders. That pushed this fund’s 12-month yield to 3.9% at the end of 2024, roughly triple that of funds tracking the broad US stock market.
This fund’s broad reach helps it weather interest-rate movements and changing secular trends. REITs’ interest-rate sensitivity depends on the properties they own because their leases vary in length. Retail REITs (13% of the portfolio) come with longer leases that leave them more vulnerable to rising rates than residential REITs (also 13%), whose short-term leases make them more adaptable. Changing consumer tastes and behaviors can have an impact on property values, too. For instance, office REITs like Boston Properties made slow pandemic recoveries because of the widespread adoption of remote work. On the other hand, retail REIT Simon Property Group bounced back with gusto when the demand for in-person entertainment returned after 2020. By spreading investment across several property types, this fund avoids interest-rate or industry bets that could overshadow its cost advantage.
This portfolio captures the full opportunity set available to its active peers, increasing the impact of its low fee. Compared with its average peer, the fund had a large stake in multifamily residential REITs and lighter allocation to data-center and self-storage ones, but it matched its property composition otherwise. The portfolios sport similar market-cap and value-growth orientations, too. Accurately reflecting the US real estate market largely puts performance in the hands of the fund’s low fee—as reliable an engine as there is.
