VNQ vs. SGOV: Why Own a REIT ETF When T-Bills Pay Almost as Much With Zero Rate Risk?
T-bills and REIT ETFs now pay close to the same yield, which sounds like an easy choice until you map out what each one actually bets on and who gets hurt when that bet goes wrong.
Cash currently pays well enough that the case for owning real estate on paper looks weak. Vanguard Real Estate ETF (NYSEARCA:VNQ) and iShares 0-3 Month Treasury Bond ETF (NYSEARCA:SGOV) currently sit in a similar income neighborhood, which raises the obvious question: why accept equity drawdown risk when a T-bill fund pays close to the same? The differentiator is what happens when rates move.
Yield Setup Looks Deceptively Close
VNQ closed at $94.60 with a forward annualized distribution of $3.42, paid quarterly. SGOV closed at $100.61 with a forward annualized distribution of $3.69, paid monthly. The two funds land in a similar yield band today, and that similarity is what pulls income investors toward the cash option.
Fed funds sits at a 4.00% upper bound, and 13-week T-bills average a 4.12% yield, essentially the engine driving SGOV’s payout.
Rate Sensitivity Is the Whole Trade
SGOV’s implicit bet is that the front end of the Treasury curve stays elevated. Its price barely moves. Year to date it is up 2.63%, and during the 2022 rate shock its price rose 1.58% while it paid interest through the storm. Duration risk is effectively nil.
VNQ’s bet runs the other direction. It needs rents, occupancy, and eventually lower discount rates to lift REIT valuations. When that bet goes wrong, the damage is real: VNQ fell 25.66% during 2022 as the Fed hiked. The fund has since regained its footing, gaining 9.01% year to date, though the last month has softened with a 3.96% pullback as the 10-year Treasury yield climbed to 5.01%. A good year does not erase the rate risk. The 2022 drawdown is the receipt.
Tax Angle Is a Wash
REIT distributions from VNQ are largely non-qualified and taxed as ordinary income at the federal level, the same treatment T-bill interest receives. The one genuine advantage sits with SGOV: Treasury interest is exempt from state and local income tax, which matters in high-tax states like California and New York. VNQ’s payouts get no such break.
Growth Is What Cash Cannot Offer
SGOV distributes what the front end pays and nothing more. VNQ owns equity in operating businesses across industrial, residential, retail, healthcare, data centers, and telecom towers. That last pair is why the growth argument still holds. Data center rents ride the AI capex cycle, and tower REITs collect leases tied to the wireless buildout (we profiled seven of the non-chip suppliers powering that same buildout in a free report here). Those cash flows can compound. A T-bill cannot.
Practical Comparison
| Factor | VNQ | SGOV |
|---|---|---|
| Expense ratio | 0.13% | 0.09% |
| Distribution frequency | Quarterly | Monthly |
| 2022 price return | -25.66% | +1.58% |
| YTD return | +9.01% | +2.63% |
| State tax on income | Taxable | Exempt |
Verdict
SGOV is the correct holding for cash that must be available and cannot lose value. Emergency reserves, short-term savings, and dry powder all belong there. VNQ is for the investor who wants real estate as a long-duration total-return holding and can tolerate a drawdown of roughly a quarter of principal to get it. The calculus flips when the front end of the curve falls meaningfully below REIT distribution yields and long rates ease, restoring the growth premium real estate equities need to work.
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Jake has been been working in financial media for almost 15 years. He focuses on all things personal finance for 24/7 Wall St. with high hopes to educate and entertain. Most recently, Jake spent 12 years working various roles at The Motley Fool. He started copy editing fool.com content, worked on premium and marketing campaigns, and helped launch The Ascent, a personal finance brand.
His work has been featured on platforms like MSN, Yahoo Finance, USA Today, and more. He's written about credit cards, social security, ETFs, savings accounts, and just about anything else you can imagine when thinking about money. Jake love to cook, play golf, and tell people he's never had a cavity. (It's true!)
