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Summary The Vanguard Global Ex-U.S. Real Estate ETF offers investors a fairly unique risk exposure. To improve portfolio diversification, ETFs like VNQI make sense as a small allocation. The best way to establish international diversification, in my opinion, is to focus on the map. Rather than focusing just on emerging vs developed markets, investors should look at the individual countries to ensure proper diversification. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds in my portfolio is Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. When I first looked at VNQI, it seemed like a great way to add a very unique exposure to my portfolio that would be not be duplicated by any of my other holdings. Since then, my perspective has been changing. This is still a good fund, but I think I weighted it too heavily in my portfolio. Expense Ratio While Vanguard funds are known for low expense ratios, this is ETF has the highest expense ratio of any of my holdings at .24%. I accepted that higher expense ratio strictly because I wanted the highly unique exposure and there are only a few liquid competitors in this niche of the market. Regions The following chart breaks down the regional exposure of the ETF. It is a useful chart, but it is remarkably vague about the specific exposures. For instance, I can tell that this fund offers me some emerging market exposure, but I can’t tell exactly which countries we are talking about. If an investor wants to ensure that their international diversification is giving them the full benefits of diversification, they will want to check the individual country allocations. Country Allocations I grabbed the following chart from Charles Schwab: (click to enlarge) This map is much easier for me to read. The allocations look fairly reasonable. Japan certainly appears to have a high weight relative to the amount of actual land there, but the country has a very developed market and makes sense as a key holding for the portfolio. As we go down the list the allocations to individual countries begin to rapidly decline which is another favorable factor in my opinion. Since the inclusion of the ETF is intended to diversify my portfolio, I want a diversified group of holdings. As you’ll see in the holdings section, the individual holdings are low enough in weight that the country allocations may be a larger factor than the individual holdings which include many companies you’ve probably never researched. Highlights Since I was a big bear on China, I like to see China with a lower weight in my international investments. After fierce selling and the falls we saw over the last couple months, the strength of my conviction is weakening and I’m more willing to accept exposure to China in my portfolio. I don’t think I’m to the point of actively seeking it, but I can deal with about 8.7% to China and 8.7% to Hong Kong. Missing Allocations Notice that only one small part of Africa is present and there are no allocations to Latin America. If you’re trying to build a thoroughly diversified international position for the portfolio, it would be wise to consider including ETFs that have these areas. That doesn’t mean investors should avoid VNQI, it just means the ideal compliments to VNQI will likely include exposures to Africa and Latin America. REITs The other thing investors should remember is that this international allocation is investing in REITs. In the domestic market REITs and regular equity markets can diverge quite substantially over years so investors would be wise to consider including allocations to the normal corporate international market. Holdings I built the following chart to represent the top 10 holdings. If you don’t recognize several of these names, don’t worry. I don’t recognize them either and I’m holding quite a bit of VNQI. I selected the ETF because of the country allocations and the REIT structure rather than the individual companies. (click to enlarge) Conclusion The Vanguard Global Ex-U.S. Real Estate ETF offers investors a fairly unique risk exposure. The fund is best used as part of a diversified portfolio and it should not be the only international equity ETF in a portfolio. I would favor complimenting the ETF with other funds that offer exposure to Latin America or Africa as well as some normal equity exposure to other develop markets. Scalper1 News
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