Does VTI Include REITs?

VTI is one of the most popular broad-based total market index funds in the US. It incorporates nearly all investable securities.

But is it a diversified fund or only equity-based? Does VTI include REITs, for example? We looked closely at VTI and its constituents to figure out the answer below.

About REITs

A real estate investment trust is a corporation that owns, operates, or finances income-generating real estate.

These firms work just like mutual funds, which pool funds from investors to put into the share market.

In the case of REITs, however, the asset class where the money is put in is properties.

They solve a genuine, real-world problem for many folks.

These trusts provide a means for traders to get their hands in the property market without having to arrange huge amounts of capital.

Without them, it is difficult to imagine owning a portfolio of several real estate holdings unless one is extremely rich.

REITs can broadly be classified into three types – publicly-traded, public non-traded, and private.

For the first type, investors can simply buy their securities from the stock exchanges, like any other equity.

They are regulated by the US SEC and follow the same rules as other equities.

The second type is similar but is not listed on stock markets.

The last ones are only available through specific brokers who deal with them. 

These have different guidelines regarding who can buy them, and therefore out of the reach of most retail traders.

One interesting aspect sets REITs apart from other avenues of investing.

They are required by law to regularly distribute 90% or more of their taxable income to shareholders.

Due to this characteristic, these securities are often sought after as sources of stable, passive income.

REITs work in a surprisingly wide variety of sectors.

These may include commercial spaces, warehouses, housing apartments, hotels, hospitals, cellphone towers, etc.

In fact, most of them choose to create a niche and focus only on a single sector. There are only a few examples of broad-based REITs.

Lastly, there is one class of these securities that are different from others – mortgage REITs.

These operate by creating mortgages or buying mortgage-backed securities from the market rather than owning or managing actual real estate.

What Is the Average Return?

Average returns on actively managed real estate investment trusts have been about 10.6% in the last 15 years.

These returns include dividend yield and value growth, of which the former is likely a bigger chunk.

Opportunistic real estate funds have also returned about 9.8%.

At an overall level, the REIT industry has regularly churned out above 10% total returns in the last three decades.

This is comparable, if not slightly better, than the S&P 500. There are several reasons for this high success rate.

For one thing, most REITs tend to have strong management and good corporate governance.

They are subject to SEC regulations that require regular financial disclosures like stocks.

Due to this reason, there is a lot of oversight on their income and expenses.

Moreover, their need to distribute nearly all of their earnings makes REITs less susceptible to speculative investments.

Since they do not hold a lot of free cash flow, it is practically impossible for them to play around with investor money.

About VTI

The Vanguard Total Stock Market ETF (VTI) is a total stock market index fund. It has been trading in the market since July 31, 2021.

It tracks the CRSP US Total Market Index, which covers nearly 100% of the investable equities in the country.

This includes all types of stocks, be they mega, large, mid, small, or micro caps.

In fact, VTI holds more than 3,900 underlying shares and is extremely diversified.

The weightage of each of the shares in the fund is as per their market capitalization and other characteristics.

These include industry weightings, price/earnings ratios, dividend yields, etc.

Usually, the higher the market cap, the more the percentage allocated to that security.

The technology sector is among the ETF’s top constituents, with its top three securities being Microsoft, Apple, and Amazon.

Nearly 23.4% of the fund’s value comes from tech. The next biggest sectors are healthcare (15%) and consumer discretionary (13.2%).

VTI is a passively managed fund that employs index sampling to track its underlying stocks.

The fund has a near one beta, which implies that it captures the broader market’s volatility almost perfectly.

This, in turn, means that the risk of investing in the fund is quite low.

Its expense ratio is also quite low – just 0.03%. In comparison, the average expense ratio of similar funds is 0.78%.

For traders looking to follow the US total stock market, VTI does this almost perfectly.

In terms of performance, the VTI has a strong five-year return of 51.78%, which matches that of the benchmark.

Does VTI Include REITs?

Yes, VTI does have some REITs as well. It is one of the few funds in the market that do.

This makes it a good place to invest money for those who want to diversify away from equities.

Having real estate investments in the fund is useful during periods of high inflation or economic downturns.

REITs are less volatile and usually do better than stocks in these scenarios.

What Percent of VTI Is REITs?

As of now, 2.98% of VTI’s holdings are in REITs. This is a good ratio to have in an equity-based fund.

Unfortunately, most ETFs that track these trusts do so only if they are focused on the sector (meaning if most of their portfolio is real estate).

Very few options let investors keep REITs only for portfolio diversification.

This sets VTI apart from other such funds.

Should I Include REIT in My Portfolio?

There are both pros and cons to having REITs in a portfolio. It is important to understand them before investing.

Benefits of REITs

Perhaps the greatest advantage of these securities is access.

They let traders pour money into a market that is hard to be in directly.

After all, buying a portfolio of real estate investments can take a huge amount of money, not to mention the time spent finding the right properties.

Secondly, real estate investing offers a very good form of diversification.

To folks who are overly exposed to only equities, having a bit of money in other sectors is important.

Real estate is a good place to do so because its returns are disconnected from the stock market.

Another key benefit is the steady stream of cash in the form of dividends that REITs offer.

This makes them particularly suited for folks looking for regular returns rather than long-term capital appreciation.

That said, when these firms buy properties, there is definite capital appreciation if the value of the underlying asset increases with time.

Lastly, REITs offer excellent protection against the impact of inflation on the stock exchanges.

This is because they give good results when inflation is rising.

Disadvantages

One key problem with REITs is that their returns, while steady and high, are also taxable income.

For investors, it is best not to hold these dividends in a taxable account. 

Otherwise, the IRS will take out its share at your regular income tax rate.

Moreover, these trusts also have high management fees and other commissions, which extract another chunk of the returns.

Lastly, REITs are much more sensitive to interest rates.

Your investments could quickly lose value when rates start rising.

Is VTI a Good Investment?

VTI is a good investment for folks who want to benefit from securities but don’t have the time or means to analyze particular stocks or market segments.

It brings nearly the entire US stock market in one place for the trader.

Due to this reason, it also has lower volatility (risk) than other avenues of equity investment.

However, VTI is not the right instrument for those who want spectacular value growth or exceptional returns.

It simply delivers results at the same pace as the overall US economy.

Traders should also consider that investment in VTI should be made with a long-term horizon in mind.

Ideally, a ten-year period should offer considerable appreciation in value.

Is It a Good First Investment?

Yes, VTI is certainly a good place to dip your toes in as a new investor.

Due to its broad-based nature, the fund is extremely diversified and therefore has lower risk when compared with other options.

Secondly, it offers similar returns as the overall market in the long term.

This is better than holding funds in the bank, a cardinal mistake many people make with their hard-earned money.

Again, VTI has a super low expense ratio of just 0.03%, which means the cost of buying or selling it is very little.

As explained above, the fund also offers diversification benefits by giving investors a piece of the real estate market.

Lastly, beginners should also understand that putting money in a broader market index fund is a long-term game.

They should not expect quick returns from an ETF like VTI.

Is It Diversified Enough?

Yes, VTI is a highly diversified fund.

As we said earlier, it tracks nearly 3,900 securities – which encompass almost the entire set of stocks in the US.

Apart from that, it has exposure in all categories of shares – large, mid, or small-cap value.

The benefit of this can be understood from the beta of the ETF, which is very near to one.

This means that it holds the same risk as the whole market.

It would take a major economic downturn for the entire stock exchange, and hence VTI, to perform poorly.

Final Thoughts

VTI is a truly diversified fund. It incorporates securities from across the spectrum, and yes, it also gives you access to REITs.

Currently, nearly 2.98% of the fund’s value comprises these real estate securities.

Having REITs in your portfolio is important because they offer many benefits.

From a steady, passive income to a hedge against inflation, there are several reasons to get into the real estate space.

But VTI is not just about diversification. It has many other benefits too.

It holds a beta of 1, an index that shows that its risk is almost the same as the entire stock market.

It would take a major economic downturn to dent its returns.

Moreover, with an expense ratio of just 0.03%, there is very little cost to owning this fund.

Overall, it is an excellent place for any beginner to start investing.