Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares VNQI

Vanguard Global ex-US Real Estate is a good choice for investors seeking real estate exposure outside the US, but its exclusion of the US market makes it an odd fit in the global real estate Morningstar Category.

The fund tracks the S&P Global ex-US Property Index, which seeks GICS-classified real estate companies and excludes those whose main source of revenue is fees or interest related to real estate activities. Those that make the cut are weighted by market capitalization, a cost-efficient approach that channels market sentiment. The larger the company, the greater proportion of fund assets it collects.

Most global real estate peers allocate more than 50% of fund assets to the US, so the exclusion means much greater exposure to foreign markets. The bulk of fund assets is therefore allocated to the Asia-Pacific region, which collects nearly two-thirds of the portfolio, more than double the category norm.

The real estate sector tends to be more sensitive to interest rates than other equity sectors. This is because real estate companies typically rely heavily on debt financing and dividend payouts. When interest rates rise, borrowing costs increase, reducing profitability and cash flow. Additionally, higher rates make fixed-income investments more attractive, diminishing the appeal of REITs’ dividend yields, which can lessen their valuations.

Excluding US real estate has put fund returns at a disadvantage compared with global real estate category peers. The US real estate market has outperformed international markets in most years since this fund’s 2010 inception. Despite a resurgent 2025, the fund has still managed just a 3.52% annualized return from its inception through October 2025. Its yield, however, has been attractive and above that of the average category peer.

The fund diversifies across countries well, but its exclusion of a key market limits this strategy to an Average Process Pillar rating.

The fund tracks the S&P Global ex-US Property Index, which is composed of stocks in the S&P Global Broad Market Index classified within the GICS Real Estate Sector. The index then applies an additional requirement for companies to derive a minimum of 60% of their revenue to come from real estate-related activities such as development, rental, management, or investment. The index excludes firms whose main source of revenue is fees or interest related to real estate activities. After these requirements are met, the remaining companies are weighted by market cap.

Market-cap weighting reduces turnover and associated trading costs by channeling the market’s consensus opinion of a holding’s relative value. The larger a company is, the greater percentage of the portfolio it will take up.

The top 10 holdings make up just over 22% of the fund, which is 15 percentage points lower than the global real estate category average. This is largely because of the exclusion of US real estate, which most category peers include. The largest REITs and real estate companies tend to be in the US, so their exclusion allows the fund to heavily favor other markets. It holds greater stakes in nearly all other foreign real estate markets than the category norm. For example, a large portion of assets is invested in Asian developed and emerging markets. The fund allocates over 50% of its assets to Asia, more than 30 percentage points greater than the category average.

Assets are spread across real estate subindustries in each region. It is well-diversified across residential, industrial, and retail subindustries, among others. This reduces the risk that trouble in any one subindustry or country will spell trouble for the whole fund. Having assets invested in hotels, hospitals, apartments, and offices spreads the risk across different corners of real estate markets all over the world. Should one subindustry falter, another will likely pick up the slack.

Focusing on REITs earns the fund a high yield. REITs must distribute 90% or more of their income to shareholders to maintain their tax-advantaged status. As a result, the fund’s yield is usually 2-3 times that of the global stock market. The fund’s 12-month yield was 4.33% at the end of October 2025.

Vanguard's equity index group earns an Above Average People Pillar for its well-supported and stable management team adept at leveraging Vanguard's comprehensive resources. Its portfolio managers benefit from the firm's global infrastructure and advanced portfolio management technology, which facilitates cost-efficient trading around the globe. The infrequent turnover of managers, coupled with Vanguard's practice of rotating them across various funds, enhances their expertise and understanding of different market segments.

The fund's managers directly handle trading, providing them with deeper insights into the portfolio's operations than a stand-alone trader might have. They are backed by a global team of dedicated personnel and employ sophisticated, scalable technology to minimize their workload and enhance tracking accuracy. Vanguard's independent risk-management team plays a crucial role in ensuring its funds adhere to predetermined tracking tolerances. It collaborates closely with the managers to oversee trades and address potential issues proactively. Vanguard compensates managers based on tracking error and excess return metrics to foster a culture of accountability and ensure that the management team's interests are closely tied to those of investors.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

Excluding US real estate has put a damper on long-term fund returns. Outperformance of that market meant the fund lagged the category average by 1.07 percentage points from its November 2010 inception through October 2025. It returned 3.52% annualized for the period.

However, 2025 saw a reversal in the general trend of US equity outperforming international. The fund has outperformed the category average by 9.43 percentage points from the beginning of 2025 through the end of October. In those 10 months, the average global real estate fund returned 10.20% while this fund returned 19.63%. Since most global real estate funds allocate over half their assets to the US, this fund does exceptionally well when international real estate outperforms.

The real estate sector is particularly sensitive to interest rate movements owing to several interrelated factors, including financing costs, yield competition, and macroeconomic risks. Rising interest rates increase borrowing costs for real estate companies, which can compress margins and limit expansion. Higher bond yields also make fixed income more attractive relative to REITs, potentially reducing investor demand. Additionally, economic slowdowns can pressure occupancy rates and impair tenants’ ability to meet lease obligations. All these factors can broadly affect the performance of the sector. A strong Japanese economy has positively contributed to fund returns lately.

Vanguard Global ex-US Real Est ETF's Prospectus Adjusted Expense Ratio is 0.12% per year. It places it in the cheapest quintile of the Morningstar US Fund Global Real Estate Category, where the median fee is 1.01% per year. This cost positioning translates into a Medalist Rating Price Score of 2.38, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.