Posted By: CFP&WM On: Jan 11th, 2016 In: Money Matters Comments: 0

REITs: Most Investors Don’t Own This Top Performer

Investors realize that the markets’ performance over the past year wasn’t anything to write home about. But there was one “jewel” of an asset class over the past year ending September 30, 2015. Unfortunately, most investor did not own it.

Below are the past year’s returns for some of the major asset classes.

REITs: Most Investors Don’t Own This Top Performer

  • Emerging markets                            -18.92%
  • Non-US Developed markets                -8.7%
  • Large US Stocks                               -0.61%
  • Small US Stock                                  1.25%
  • US Aggregate Bond                            2.94%
  • US Real Estate Investment Trust        11.82%

You read that right; as an asset class, Real Estate Investment Trust or REIT was the top performer. And it’s not just in this past year that REITs did well. Over the past decade, REITs have been in either the top 1 or 2 spots (out of a total of 13 investment types) six times. That’s twice as often as the next best asset class. See for yourself here.

By definition, an REIT is a company that either owns or finances real estate which produces income. REITs allow an individual to invest in a portfolio of large properties simply by purchasing the REIT stock. The stockholders of the REIT share the ownership and derive earnings either through appreciation of the stock or through income that is produced through the real estate investment. The benefit to the REIT stockholder is that they don’t actually have to buy or finance a property.

The two basic types of REITs are:

  • Equity REIT: An Equity REIT generates income via rent collection of the properties owned, and/or from sales after appreciation over a period of time. The types of properties that are owned under an Equity REITs generally consist of hotels, offices, shopping malls, industrial facilities, student housing, shopping centers, hospitals, nursing homes, large apartments, infrastructure, and occasionally timberlands.
  • Mortgage REIT: A Mortgage REIT invests in mortgages on residential and/or commercial properties. While these properties don’t have the appreciation element of the Equity REIT they do often generate high income.

Most investors who utilize this asset class tend to own their REITs within a mutual fund or within an Exchange Traded Fund or ETF. Some investors, albeit a smaller number, buy individual REITs which trade as stock on one of the major Wall Street exchanges.

Less common are non-listed or private REITs. These types of REITs are considered higher risk. They tend to have high fees, may be subject to a conflict of interest, lack transparency, and may be illiquid. Quite often, they are sold as a result of the high commissions paid to the salesperson. Most investors should avoid these private REITs.

For most investors, REITs provide numerous benefits, including:

  • Performance: Equity REITs have outperformed Wall Street’s benchmarks (DJIA, S&P500 and the NASDAQ100) over most long-term time horizons.
  • Income/Dividends: Public REITs can provide a reliable income stream.
  • Diversification:  Equity REIT’s performance shows little correlation to that of the broader equity or bond markets.
  • Transparency: Like any other publicly traded company, REITs listed on a Wall Street exchange must operate under the same rules and regulations as set out by the SEC and other regulatory bodies.
  • Liquidity: Publicly traded REIT shares are bought and sold like mutual funds or stocks.

Many investors know very little about REITs, which is unfortunate. What is worse, though, is that REITs are not often included as an investment choice by 401k investment committees. In fact, only about 30% of 401(k) plans offer an REIT. Those plan fiduciaries are essentially denying investors access to a great investment! The 401K plan is, for many Americans, the only type of investment they undertake and not having access to an REIT is a real shame.

REITs should be a primary consideration when an investor is “designing” his or her portfolio. An REIT provides greater diversification, and the potential for higher total returns as well as lower overall risk. Simply put, the REIT’s income generation capability and capital appreciation makes it an excellent counterbalance to typical portfolio components, i.e. stocks, bonds and cash.

Most advisors recommend that an investor’s portfolio have between 5% and 15% allocated in an REIT. So if you don’t have an REIT in your portfolio you’re missing out on a tremendous opportunity.

A few of the largest REITs traded on Wall Street include: PUBLIC STORAGE (PSA), Equity Residential (EQR), Health Care REIT, Inc. (HCN), Simon Property Group Inc. (SPG), Ventas, Inc. (VTR) and General Growth Properties Inc. (GGP).

Among the largest REIT Mutual Funds are these highly recognized names: T. Rowe Price (TRREX and PAREX), Vanguard (VGSNX, VGRSX, VGSLX and VGSIX), and Fidelity (FRXIX and FSRVX).

Of the more than 270 REIT Mutual Funds and REIT ETFs, Cohen & Steers Real Estate Securities (CSZIX and CSDIX), has consistently had the highest returns for 1-year, 3-year and 5-year time periods.

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