As we draw closer to the end of this current decade, I think its fairly safe to say one of the defining trends in the investing world for the last ten years has been the rise of the exchange-traded fund (ETF). ETFs started life as simple index funds but today have morphed into a full-blown class of assets that cover everything from commodity futures and gold to short selling and the bond market.
One such ‘niche’ ETF that exists today is the Vanguard Australian Property Securities Index ETF (ASX: VAP). This fund from Vanguard aims to (in their own words) “track the return of the S&P/ASX 300 A-REIT Index before taking into account fees, expenses and tax.”
REITs (or real estate investment trusts) are really companies that own property assets. Such companies are governed by special rules, which dictate that (amongst other tax and reporting requirements) at least 90% of earnings must be paid out as dividend distributions.
REITs are loved by income investors for this reason – you can often get very high yields on cost.
Rather than owning individual REITs, Vanguard’s VAP ETF allows you to own a basket of them – weighted proportionally by market capitalisation. VAP currently holds 30 stocks, of which Goodman Group (ASX: GMG), Scentre Group (ASX: SCG), Dexus Property Group (ASX: DXS), Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) make up the top 5.
Is VAP a buy for income?
I think this broad exposure to the listed property market is a definite positive. All REITs are affected by similar macro trends (like interest rates and property prices/rental yields), so I think it’s advantageous to own a basket rather than trying to pick 2 or 3 of the best.
VAP offers buyers today a five year performance of 12.56% per annum and a trailing dividend yield of 4.3%. On these numbers, I think this ETF could be a valuable addition to an income-focused portfolio. REITs typically offer less correlation to the broader stock market than other ASX shares due to the different assets in play. Thus, VAP offers some income diversity for a dividend portfolio as well.
Looking at VAP as an income-producing asset, I think it’s definitely worthy of consideration as an investment today. Many dividend shares have been bid to new highs over the last few months, but many of VAP’s holdings don’t look to expensive with an average price-to-earnings multiple of 14.38. for anyone searching for yield in today’s market, you could certainly do worse than this ETF.
Where to invest $1,000 right now
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*Returns as of February 15th 2021
Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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