Diversifying Your Portfolio with VNQI: An International REIT ETF

The article discusses the VNQI ETF, an international REIT ETF that provides good diversification for a portfolio. It is recommended for US investors looking to invest in international REITs to reduce concentration risk and improve diversification.

The Vanguard Global ex-US Real Estate ETF (VNQI) offers a strategic way for U.S. investors to diversify their portfolios by investing in international Real Estate Investment Trusts (REITs). This ETF, which tracks the S&P Global ex-US Property Index, provides exposure to a broad range of international real estate markets, helping to mitigate concentration risk and tap into growth opportunities in emerging economies.

Benefits of Investing in VNQI

1. Diversification and Reduced Concentration Risk: VNQI allows investors to spread their real estate investments across different economies, reducing the impact of economic downturns and regulatory changes specific to the U.S. market.

2. Access to Emerging Markets: The ETF invests in rapidly growing economies such as Singapore and India, offering high growth potential and the opportunity to participate in these markets.

3. Different Economic Cycles: When the U.S. market slows down, other parts of the world may be experiencing growth, smoothing out overall portfolio returns.

4. Property Type and Sector Diversification: International REITs can provide exposure to different property types and sectors, such as technology innovation in Japan or natural resources in certain regions.

5. Currency Diversification: Investing in international REITs can serve as a hedge against a weak U.S. dollar.

Portfolio Composition and Performance

VNQI is structured as an exchange-traded share class of the Vanguard Global ex-US Real Estate Index Fund and has approximately $3.4 billion in assets. The fund is diversified across various countries, with the largest allocation to the Pacific region (47%) and Japan (23%) [1]. The fund has a 2-star Morningstar rating and a Bronze rating, with mediocre long-term performance but low expenses compared to its category peers.

Tax Implications

The VNQI ETF pays nonqualified dividends, which are taxed at the ordinary income tax rate. However, foreign tax credits are available to offset taxes paid to foreign governments. Holding VNQI in a tax-advantaged account like an IRA may result in the loss of the foreign tax credit, but the benefit of avoiding/deferring ordinary income taxes can outweigh this loss [1].

Alternatives and Asset Correlations

Some alternatives to VNQI include closed-end funds like IGR and PGZ, as well as ETFs like REET and RWX. However, VNQI stands out due to its lower expense ratio and broader international exposure. Asset correlations show that VNQI has high correlations with other global REIT ETFs and closed-end funds, indicating a strong relationship with the broader international real estate market [1].

Trading and Summary

VNQI is quite liquid and suitable for market orders, with a bid-ask spread typically of one cent. The fund is recommended for tax-deferred retirement accounts due to its non-qualified dividends. Gradual scaling into the ETF is advised due to its strong performance in 2025 and potential for a correction.

References

[1] https://seekingalpha.com/article/4799720-vnqi-this-international-reit-etf-provides-good-diversification-for-a-portfolio