Presenting: The ETF Monkey Vanguard Core + REIT Portfolio

I recently wrote a series of articles for the Seeking Alpha website, for which I have the privilege of being a certified author.

The initial articles covered, in detail, three ETFs from the Vanguard family which can be used very nicely to build a simple, yet incredibly well-diversified portfolio. These are the Vanguard Total Stock Market ETF, the Vanguard Total Bond Market ETF, and the Vanguard FTSE All-World ex-US ETF

Ultimately, those articles culminated in a final article in which I presented The ETF Monkey Vanguard Core Portfolio. In that article, I developed several suggested weightings for each of the three components, based on an investor's age and risk tolerance. I accomplished this by working from the guidance available by reviewing the portfolio composition and weighting of various professionally-managed Vanguard Target Date funds. Finally, I selected one and built a hypothetical $50,000 portfolio, the performance of which I will track going forward. If you have not had a chance to review at least the summary article, I recommend that you do so before going any further, as I will build on it for what I develop here. I won't bore you by repeating any of the information covered there.

Why Add REITs?

I selected Real Estate Investment Trusts (REITs) as the addition to my portfolio because they represent an asset class different from common stocks and bonds. Basic details on REITs, as well as a link to some further reading, can be found in one of the educational articles I wrote for this blog. 

Basically, a REIT is a corporate entity that invests in real estate. What makes REITs somewhat unique is their tax status. To qualify as a REIT, a company must agree to distribute at least 90% of its earnings to its investors in the form of dividends. REITs derive most of their income from rents, but may also from time to time reap the benefits of capital gains: purchasing properties during periods when they are undervalued for some reason and selling them later at a profit.

As such, their income comes from real assets; physical properties that generate income on a regular basis. Further, especially when packaged in a well-diversified ETF as we will feature in this portfolio, they offer the investor the benefits of owning a wide range of different types of property (Office buildings, residential rentals, shopping malls, etc.) across diversified geographical areas, providing at least a measure of defense against an economic downturn or catastrophic event in one industry or location.

The ETF Monkey Vanguard Core + REIT Portfolio

For this portfolio, we will add the Vanguard REIT Index ETF (VNQ), My latest article for Seeking Alpha reviewed this ETF in comparison with two competing offerings from State Street Global Advisors and Charles Schwab. Since, after all, this is the Vanguard Core + REIT Portfolio, VNQ is the ETF that we will include.

To decide on the portfolio weightings, I started with the weightings used in my original portfolio. I made the (somewhat arbitrary) decision to take 2.5% from each of the other asset classes and create a 7.5% weighting in REITs. Overall, I feel that a REIT weighting somewhere between 5% and 10% is appropriate for our portfolio (I currently carry a weighting of 5% in my personal portfolio), and 7.5% is right in the middle of that range.

In the picture below, you will see the new target weightings for each asset class (in the orange). In the blue, using share prices as of 6/30/15, you will see the actual amounts I purchased. Finally, you will note in the green that my overall weighted expense ratio has increased very slightly; from .07787% in the original core portfolio to .08083% in the version containing REITs. This is due to a 5% weighting being moved from VTI and BND with their incredibly low .05% and .07% expense ratios, offset somewhat by 2.5% being moved from VEU with its .14% expense ratio.

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Next, here is the screen picture from Google Finance, where all my transactions to set up the portfolio are reflected.

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Since I did this retroactively, you will see a line item on July 1 for the BND dividend that was paid on that date. You can ignore that for our purposes.

Summary and Conclusion

So there you have it. Similar to the original portfolio, I plan to provide performance updates to this version, likely on a quarterly basis. Whereas I hope to provide updates to the original portfolio on Seeking Alpha, updates to this version will only be published here on my blog.

I hope to see you back soon, as we examine the updates together.

Until then, happy investing!


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