Upcoming 2017 changes to Vanguard REIT fund(s)

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tibbitts
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Upcoming 2017 changes to Vanguard REIT fund(s)

Post by tibbitts » Fri Aug 11, 2017 6:55 pm

I've been searching for a Boglehead post(s) discussing the upcoming significant changes to Vanguard's REIT index fund, and introduction of the new Vanguard REIT II index fund (for those Bogleheads with $100MM to devote to retaining their current REIT exposure, apparently) but haven't found anything beyond the announcement, buried in another post, viewtopic.php?t=223426

It seems like everyone would have some thoughts as to how this change affects the value of the Vanguard REIT fund, assuming one accepts the value of having REITs at a level beyond they're reflected in the total market. Maybe I've missed the discussion somewhere?

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iceport
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by iceport » Fri Aug 11, 2017 8:35 pm

tibbitts wrote:It seems like everyone would have some thoughts as to how this change affects the value of the Vanguard REIT fund, assuming one accepts the value of having REITs at a level beyond they're reflected in the total market. Maybe I've missed the discussion somewhere?
Huh. I hadn't heard about this, so thanks for the heads-up. Information seems to be difficult to come by. Some of the tidbits I found include:

From the Vanguard announcement:
In addition to aligning the funds with other Vanguard sector funds and broadening the funds’ mandates, these related actions are designed to provide additional investment capacity while ensuring continued compliance with SEC and Internal Revenue Code diversification requirements.
— From two brief articles, https://www.etftrends.com/a-big-reit-co ... g-changes/ and http://www.barrons.com/articles/timber- ... 1500994456, it seems some amount of timber REITS will be included.

— This NAREIT article, https://www.reit.com/nareit-you/nareit- ... sure-reits, notes that the fund will still be 95% invested in listed REITs.

That Barron's article refers to the composition of the new index, but I couldn't find it. I hope this doesn't lead to a raft of front-running. Other than the front-running potential, I'm cautiously optimistic that this will be a benefit in the long term, with broader diversification.

What are the ramifications in terms of the fund's volatility? It's overlap with the broader market indexes? It's function as a proxy for real estate ownership?
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by triceratop » Fri Aug 11, 2017 8:39 pm

It's possible (unclear to me at least) the note about diversification is not diversification to us the investors but requirements about the portion of outstanding shares which by law can be owned by a single fund.
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iceport
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by iceport » Fri Aug 11, 2017 8:50 pm

I think you are correct, but there is also a reference to broader exposure to the real estate market (which I read as providing more investment capacity by increasing the number of stocks in the index), and the note from people who must have access to the index composition that it will include timber REITs. The fund currently holds only 157 stocks, with over $63B in assets...
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by kosomoto » Fri Aug 11, 2017 10:52 pm

Not too happy about this since REITs are 10% of my portfolio. If I wanted other real estate companies I would have bought a real estate fund. REITs pay no corporate taxes and I like that fact, this obliterates my point of holding.

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by JDDS » Fri Aug 11, 2017 11:15 pm

iceport wrote:
tibbitts wrote:It seems like everyone would have some thoughts as to how this change affects the value of the Vanguard REIT fund, assuming one accepts the value of having REITs at a level beyond they're reflected in the total market. Maybe I've missed the discussion somewhere?
Huh. I hadn't heard about this, so thanks for the heads-up. Information seems to be difficult to come by. Some of the tidbits I found include:

From the Vanguard announcement:
In addition to aligning the funds with other Vanguard sector funds and broadening the funds’ mandates, these related actions are designed to provide additional investment capacity while ensuring continued compliance with SEC and Internal Revenue Code diversification requirements.
— From two brief articles, https://www.etftrends.com/a-big-reit-co ... g-changes/ and http://www.barrons.com/articles/timber- ... 1500994456, it seems some amount of timber REITS will be included.

— This NAREIT article, https://www.reit.com/nareit-you/nareit- ... sure-reits, notes that the fund will still be 95% invested in listed REITs.

That Barron's article refers to the composition of the new index, but I couldn't find it. I hope this doesn't lead to a raft of front-running. Other than the front-running potential, I'm cautiously optimistic that this will be a benefit in the long term, with broader diversification.

What are the ramifications in terms of the fund's volatility? It's overlap with the broader market indexes? It's function as a proxy for real estate ownership?
The Vanguard link was interesting, thanks for posting.

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by Splendid Exchange » Sat Aug 12, 2017 1:23 am

I found some information on the "MSCI USA IMI Real Estate Index" below (click on "fact sheet" under "MSCI USA IMI Real Estate Index"). This index features 180 stocks.

https://www.msci.com/msci-usa-imi-sector-indexes

Please note what I found is not the "25/50" version of the index mentioned by Vanguard in it's press release. My guess is the only difference between the version I found and the "25/50" version is the "25/50" index is managed to meet certain federal legal standards such that A) no single stock ever accounts for 25% or more of the index and B) the total combined weight of all stocks which individually account for 5% or more of the index is less than 50%. But that is merely my guess.

If my guess is correct, then non-reit stocks account for less than 4% of the proposed index.

For comparison's sake, below is a similar breakdown of the existing index (MSCI US REIT INDEX) used by Vanguard for it's REIT index products. The existing index features 156 stocks and is 100% REIT.

https://www.msci.com/www/index-factshee ... x/08187641

From looking at the pie charts in both fact sheets, it seems the biggest difference is that the "specialized REITs" subcategory is weighted much more heavily in the proposed index (29% vs 17%).

My take so far: the index proposed by Vanguard is not a dealbreaker.

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by grok87 » Tue Aug 15, 2017 7:46 pm

thanks for the heads up.

not a fan of this change...
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Vanguard's Proposed REIT Index Fund Change

Post by BBBob » Wed Aug 23, 2017 10:53 pm

[merged BBBob's post and its reply into this existing thread - moderator prudent]

After reading through the proxy material from Vanguard, I am pretty negative on the proposed change (No. 4) to broaden the REIT index fund to allow investment in (for example) real estate management companies (if I understand this correctly). To me, this waters down the characteristic that sets the fund apart from others that invest in companies rather than real estate, as well as the requirement applicable to REITs that a large percentage of the earnings (90%?)must be disbursed to the shareholders.

How do those of you more knowledgeable than me (which is likely most, if not all, of you) view the proposal?

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Re: Vanguard's Proposed REIT Index Fund Change

Post by White Coat Investor » Wed Aug 23, 2017 10:58 pm

I voted "for" on the proxy materials. At 3% of the fund, I can't imagine it matters all that much that there are real estate companies in the fund that aren't REITs.
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by JustinR » Sat Sep 02, 2017 7:04 pm

Is this a positive or negative?

From reading the materials it sounds good? But that's because the board supports it and wants us to vote Yes.

It seems good right? More diversification in a limited space?

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by badbreath » Sat Sep 02, 2017 7:22 pm

tibbitts

I've been searching for a Boglehead post(s) discussing the upcoming significant changes to Vanguard's REIT index fund, and introduction of the new Vanguard REIT II index fund (for those Bogleheads with $100MM to devote to retaining their current REIT exposure, apparently) but haven't found anything beyond the announcement, buried in another post, viewtopic.php?t=223426

It seems like everyone would have some thoughts as to how this change affects the value of the Vanguard REIT fund, assuming one accepts the value of having REITs at a level beyond they're reflected in the total market. Maybe I've missed the discussion somewhere?
It looks to me because of the entry point of $100M this is being set up for the larger 401k to have a REIT offering.
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Re: Vanguard's Proposed REIT Index Fund Change

Post by tibbitts » Sat Sep 02, 2017 7:38 pm

BBBob wrote:
Wed Aug 23, 2017 10:53 pm
[merged BBBob's post and its reply into this existing thread - moderator prudent]

After reading through the proxy material from Vanguard, I am pretty negative on the proposed change (No. 4) to broaden the REIT index fund to allow investment in (for example) real estate management companies (if I understand this correctly). To me, this waters down the characteristic that sets the fund apart from others that invest in companies rather than real estate, as well as the requirement applicable to REITs that a large percentage of the earnings (90%?)must be disbursed to the shareholders.

How do those of you more knowledgeable than me (which is likely most, if not all, of you) view the proposal?
I think that's a concern most of us have, although I'm definitely not an expert. Now if they said the only change they wanted was to allow timber or farmland for example that might get a different reaction, but I'm not sure REOCs are going to add to the diversification of the fund. I don't know whether REOCs are underrepresented in TSM, for example, to the extent that (arguably) real estate ownership is. I guess that would be a determining factor.

On the other hand, there is this, which suggests the changes may be necessary for reasons I hadn't thought of:

http://news.morningstar.com/all/ViewNew ... 7_univ.xml

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by abuss368 » Sun Sep 03, 2017 5:17 pm

I voted "for" all proposals as I did not see much of a problem.
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by siamond » Sun Sep 03, 2017 6:51 pm

Thank you, OP, totally missed it.

This doesn't seem terribly consequential, overall. Still, its always annoying to see a long term strategy take a turn out of your control...

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by nedsaid » Mon Sep 04, 2017 12:29 am

Here is an example where indexing has created a minor problem in the markets. I suppose Vanguard will have to close its REIT funds. Maybe what Vanguard needs is to split in two: Vanguard I and Vanguard II. That way, the REIT funds could stay open. I jest, but as Vanguard gets larger and larger, at some point something like this might have to be considered, if nothing else for anti-trust reasons.
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Bloomberg: Vanguard REIT Index Considers Changing its Index.

Post by GreatOdinsRaven » Tue Sep 12, 2017 6:06 pm

Vanguard REIT Index ETF considers a change to a new Index
Vanguard, the $4.4 trillion asset manager, wants to adopt a new benchmark for the exchange-traded fund, which goes by the ticker VNQ, that would add specialty REITs and real estate management and development firms to the mix. Currently, the fund -- the largest U.S. sector product and the 20th largest ETF overall -- tracks a smaller selection of real estate investment trusts -- companies that own, manage or invest in properties.
What does this mean, if anything, for the average investor using its sister fund, VGSLX Vanguard REIT Index admiral Shares, in a tax-advantaged Roth IRA or 401(k) account, if investors sell prior to the index switch (assuming it's approved)? If sellers create significant capital gains, does this affect tax advantaged investors at all?
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by LadyGeek » Tue Sep 12, 2017 7:56 pm

^^^ GreatOdinsRaven - I moved your post into here.
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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by GreatOdinsRaven » Tue Sep 12, 2017 8:16 pm

LadyGeek wrote:
Tue Sep 12, 2017 7:56 pm
^^^ GreatOdinsRaven - I moved your post into here.
Apologies LadyGeek, I did a google search for "bogleheads VNQ" before posting and found nothing.

I don't frequent the forums nearly as much as I used to and missed the thread, above.

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by siamond » Tue Sep 12, 2017 10:16 pm

For reference, the new VNQ index (MSCI US IMI/Real Estate 25-50 USD) can be found on Morningstar here, but there is very little history to speak of, so this doesn't really help much.
http://quotes.morningstar.com/indexquot ... F00000ZBMR (NR version)
http://quotes.morningstar.com/indexquot ... F00000ZBMQ (GR version)

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by Leesbro63 » Wed Sep 13, 2017 7:48 am

I hold this fund in my IRA. I just tuned into this thread. It's not clear what will happen and what I might need to do. What about folks who have this as a highly appreciated taxable fund? Will they have to sell and pay big cap gains taxes?

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by tibbitts » Wed Sep 13, 2017 7:58 am

Leesbro63 wrote:
Wed Sep 13, 2017 7:48 am
I hold this fund in my IRA. I just tuned into this thread. It's not clear what will happen and what I might need to do. What about folks who have this as a highly appreciated taxable fund? Will they have to sell and pay big cap gains taxes?
The only reason you would have to sell is if you want to try to maintain the same index exposure as before elsewhere. It doesn't seem like the change would be sufficient to make it worthwhile to incur huge capital gains, although some will not view it as ideal. Similar situations have occurred with other VG funds, including index funds. In this case VG might not have had the choice of leaving the fund as it was indefinitely for the reasons discussed.

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by Leesbro63 » Wed Sep 13, 2017 10:22 am

Thank you for the explanation. The current Vanguard REIT (Admiral) Fund is about 7% of my net worth. In my IRA. Is there a reason I should do anything with this change, if I want 7% of my net worth to be in a diversified real estate index fund?

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Re: Upcoming 2017 changes to Vanguard REIT fund(s)

Post by siamond » Wed Sep 13, 2017 12:48 pm

Leesbro63 wrote:
Wed Sep 13, 2017 10:22 am
Thank you for the explanation. The current Vanguard REIT (Admiral) Fund is about 7% of my net worth. In my IRA. Is there a reason I should do anything with this change, if I want 7% of my net worth to be in a diversified real estate index fund?
As explained earlier in this thread, there is apparently little reason to fret about this change, this is just a little more real estate diversification introduced by Vanguard, not necessarily a bad thing, and very limited impact overall.

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