REITs - Where is the benefit again?

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REITs - Where is the benefit again?

Post by abuss368 »

Bogleheads -

Anyone notice that both Total Stock and REIT are down close to the same year to date?

Total Stock - down 9.47%

REIT - down 10.82%

Where is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?

Since that time period, it appears as if REITs have become more correlated with the overall market. They were separated from the Finance sector of the S&P 500 into their own sector (real estate) in 2016.

Keep investing simple.

Total Market index funds.

Tony
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AllMostThere
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Re: REITs - Where is the benefit again?

Post by AllMostThere »

That's kind of why I dumped Reits couple of years ago. Their performance seemed to be more turbulent with large swings, even on a daily basis. After much review and contemplation, I just dumped them all. At this point in my life, I desire more simplicity and not uncertainty. I no longer have an allocation to Reits other than the default percentages in the index funds I own.
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Re: REITs - Where is the benefit again?

Post by rockstar »

International is down too.

What diversification benefit are you specifically looking for?
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Re: REITs - Where is the benefit again?

Post by Kenkat »

27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
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Re: REITs - Where is the benefit again?

Post by nisiprius »

abuss368 wrote: Thu Jan 27, 2022 7:07 pmWhere is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?...
There sure as heck wasn't one in 2008-2009. The Vanguard REIT index fund lost ⅔ of its value when the market was "only" losing ½.
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Re: REITs - Where is the benefit again?

Post by Ocean77 »

If you are looking at return figures with a 3 week horizon, you should not invest in either stocks or REITs.
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Re: REITs - Where is the benefit again?

Post by abuss368 »

rockstar wrote: Thu Jan 27, 2022 7:36 pm International is down too.

What diversification benefit are you specifically looking for?
Last I looked international was not down as much as US. But last year started the same.

Tony
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Re: REITs - Where is the benefit again?

Post by abuss368 »

Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Not a day thing at all - 27 or what have you days. More along lines of market pullback a little perspective. But yes, they have had a nice 20 year run!

Tony
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Re: REITs - Where is the benefit again?

Post by TheDoctor91 »

https://www.portfoliovisualizer.com/bac ... tion2_1=50

Though, I don’t personally own any REIT ETF.
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Re: REITs - Where is the benefit again?

Post by abuss368 »

TheDoctor91 wrote: Thu Jan 27, 2022 9:14 pm https://www.portfoliovisualizer.com/bac ... tion2_1=50

Though, I don’t personally own any REIT ETF.
Interesting considering the time frame.

Thanks!
Tony
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Re: REITs - Where is the benefit again?

Post by alex_686 »

So, we are looking at the diversification effects of 2 asset over a period of less that a month. And on this scant data are willing to make a call?

Sigh.

Lets look at a simplified model and f equity returns.

Expected Returns = risk free bond yield + equity risk premium.

As interest rates have fallen like a rock the influence of interest rate yield has increased, so the correlation between all stocks have increased. The current debate over inflation and fed policy has been dragging all stocks around the pen like a 800 pound gorilla.

I personally believe that REITs are a unique diversifier it is not a magical immutable property.
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Re: REITs - Where is the benefit again?

Post by mrpotatoheadsays »

abuss368 wrote: Thu Jan 27, 2022 7:07 pm Where is the diversification benefit?
Reduced long-term portfolio volatility.


Investment strategies (equities only) (CAGR 1990-2019):

2-Fund Portfolio
--------------------------
70% US Total Stock Market + 30% Int'l Total Stock Market (Bogleheads): 8.8% [Standard Deviation 17.1%]

3-Fund Portfolio
--------------------------
60% US Total Stock Market + 30% Int'l Total Stock Market + 10% US REITs (Bogleheads/Ferri): 8.9% [Standard Deviation 16.4%]
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Re: REITs - Where is the benefit again?

Post by 000 »

You shouldn't expect any risk asset to hold up during a correction.

What matters for equity diversification is long term outcomes.

Holding REITs might make sense if one doesn't own property oneself.
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Re: REITs - Where is the benefit again?

Post by venkman »

REIT's were never an uncorrelated asset class. At best, they were only moderately correlated. Over the past decade, their correlation with the overall market has been about 0.70, so you wouldn't expect REIT's to zig when the market zags.

The diversification benefit is that the yearly performance of REIT's doesn't always correspond closely with the performance of the overall market. e.g. In 2013 and 2020, REIT's hugely underperformed the market; and in 2014 and 2021, they hugely outperformed. A portfolio with a set allocation to REIT's would've rebalanced when they were low and gotten rewarded when they outperformed the market the following year.

That being said, research has determined that REIT's are not a unique asset class, and that their returns can be explained by known risk factors (size, value, term). REIT's tend to behave similarly to a portfolio of 2/3 small value stocks and 1/3 long term corporate bonds, so one doesn't need REIT's to get exposure to those unique sources of risk.
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Re: REITs - Where is the benefit again?

Post by Copernicus »

I understand that the real benefit comes from rebalancing the REIT asset regularly. Otherwise its just another class of stocks.
Look at the "periodic chart" of asset class returns.

https://awealthofcommonsense.com/wp-con ... 1143-1.png
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Re: REITs - Where is the benefit again?

Post by dogagility »

A number of the largest REITs are not what I would consider traditional real estate. https://www.millionacres.com/real-estat ... ded-reits/

I have no expectation of REIT index funds to be uncorrelated with total stock market index funds.
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Re: REITs - Where is the benefit again?

Post by MeanVarianceOptimal »

For those running backtests and calculating efficient frontiers: you need to include bonds in the asset mix for a fair comparison, since REITs have interest rate exposure. When including bonds in a portfolio, REITs have historically offered very little additional diversification.
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Re: REITs - Where is the benefit again?

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Re: REITs - Where is the benefit again?

Post by Valuethinker »

nisiprius wrote: Thu Jan 27, 2022 7:41 pm
abuss368 wrote: Thu Jan 27, 2022 7:07 pmWhere is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?...
There sure as heck wasn't one in 2008-2009. The Vanguard REIT index fund lost ⅔ of its value when the market was "only" losing ½.
No. Wait.

That was diversification proving its value.

Your equity portfolio protected you against losses in your REIT portfolio (and in Mortgage Backed Securities)

:? :? :oops:
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Re: REITs - Where is the benefit again?

Post by Visitor76 »

The main problem with market REITs such as VGSLX is that like other broad indexes (VTSAX for example) their performance is directly tied to that of the real estate companies within the fund. No different than when we see declines in other broad indexes such as VTSAX and VFIAX.

If you want to benefit from true diversification from a real estate fund then I would invest in crowdfunding platforms such as Crowdstreet and Fundrise. With these you are directly invested in a real estate project and thus your capital is tied to the performance of that property or properties.
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Re: REITs - Where is the benefit again?

Post by NiceUnparticularMan »

Real estate is a major category of productive asset, and REITs make it relatively easy for personal investors to make diversified, low-cost, leveraged investments in those assets.

Of course some ordinary companies own some real estate, and some stock index funds include REITs. But my personal feeling is that if your general aim is to track the different sorts of investments that are made in productive assets, subject to screens for reasonable costs and such, then you are likely going to end up "underweight" in real estate if you only invest in it through ordinary company stocks and broad stock index funds.

Unless perhaps you own a home and account for that as a real estate investment. But I don't like to do that, including because it isn't diversified, and also because so much of the expected return on home ownership is implied rent savings, which to me is properly accounted for on the income side and not the investment side.

Anyway, that to me is the benefit of REITs--they allow me to widen the scope of my investment in productive assets in a way that is consistent with my investment philosophy. Backtesting, other anecdotal reasoning, and such doesn't really play a role in my reasoning.

But at the end of the day, if you would only be investing a smallish amount in REITs anyway, then the amount you get from stock index funds may be close enough that it doesn't much matter one way or another.
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Re: REITs - Where is the benefit again?

Post by LateStarter1975 »

AllMostThere wrote: Thu Jan 27, 2022 7:12 pm That's kind of why I dumped Reits couple of years ago. Their performance seemed to be more turbulent with large swings, even on a daily basis. After much review and contemplation, I just dumped them all. At this point in my life, I desire more simplicity and not uncertainty. I no longer have an allocation to Reits other than the default percentages in the index funds I own.
+1
I reached the same conclusion and dumped REITs in my portfolio about 4 years ago.
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Re: REITs - Where is the benefit again?

Post by Robot Monster »

I think there are probably arguments both for, and against, holding REITs, and in the end it's a do whatever you feel like situation. Same goes for holding international, small-cap, etc.

I'm sure everyone knows David Swensen advocated for a large allocation. Jeremy Siegel recently said "real estate [and] REITs still are good assets to own.”

On the other hand, dumping your REITs in the toilet in exchange for Total Stock is a perfectly valid thing to do. I really do believe that. It comes down to that one simple word. Whatever.
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Re: REITs - Where is the benefit again?

Post by loukycpa »

Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Valuation matters though.

In 2000 REITs were yielding 7 or 8% as I recall, well above inflation.

Now in 2022 with REITs yielding 2 or 3%, and inflation running 6 or 7%?

In 2000, sure back up the truck and I'll jump on. Today? Not so much.
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Re: REITs - Where is the benefit again?

Post by Kenkat »

loukycpa wrote: Fri Jan 28, 2022 11:01 am
Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Valuation matters though.

In 2000 REITs were yielding 7 or 8% as I recall, well above inflation.

Now in 2022 with REITs yielding 2 or 3%, and inflation running 6 or 7%?

In 2000, sure back up the truck and I'll jump on. Today? Not so much.
You could say the exact same thing about bonds, so I still think there can be a benefit to holding REITs long term as a diversifier. They may not be as attractive from a short term valuation perspective but I don’t play that game.
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Re: REITs - Where is the benefit again?

Post by Robot Monster »

loukycpa wrote: Fri Jan 28, 2022 11:01 am
Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Valuation matters though.

In 2000 REITs were yielding 7 or 8% as I recall, well above inflation.

Now in 2022 with REITs yielding 2 or 3%, and inflation running 6 or 7%?

In 2000, sure back up the truck and I'll jump on. Today? Not so much.
Are you sure you're just supposed to look at the dividend? I mean, after all, Total Stock Market's dividends don't keep up with inflation, either, yet it's supposedly a good inflation protector, e.g. "Jeremy Siegel says owning ‘real assets’ like stocks is best defense against inflation". Even Vanguard High Dividend Yield Index with its 2.64% 30 day SEC doesn't come close to 6 or 7%.
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Re: REITs - Where is the benefit again?

Post by loukycpa »

Robot Monster wrote: Fri Jan 28, 2022 11:29 am
loukycpa wrote: Fri Jan 28, 2022 11:01 am
Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Valuation matters though.

In 2000 REITs were yielding 7 or 8% as I recall, well above inflation.

Now in 2022 with REITs yielding 2 or 3%, and inflation running 6 or 7%?

In 2000, sure back up the truck and I'll jump on. Today? Not so much.
Are you sure you're just supposed to look at the dividend? I mean, after all, Total Stock Market's dividends don't keep up with inflation, either, yet it's supposedly a good inflation protector, e.g. "Jeremy Siegel says owning ‘real assets’ like stocks is best defense against inflation". Even Vanguard High Dividend Yield Index with its 2.64% 30 day SEC doesn't come close to 6 or 7%.
S&P 500 companies (the rest other than REITs) pay out maybe 30 or 40% of their operating earnings as dividends. These companies retain most of their earnings and reinvest in their business, buy back stock, etc.

REITs pay out 90%. (Actually with REITs you look more at FFO than GAAP earnings, more relevant).

So yes with REITs the dividends matter more relatively speaking, because it drives more of the return.
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Re: REITs - Where is the benefit again?

Post by loukycpa »

Kenkat wrote: Fri Jan 28, 2022 11:27 am
loukycpa wrote: Fri Jan 28, 2022 11:01 am
Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Valuation matters though.

In 2000 REITs were yielding 7 or 8% as I recall, well above inflation.

Now in 2022 with REITs yielding 2 or 3%, and inflation running 6 or 7%?

In 2000, sure back up the truck and I'll jump on. Today? Not so much.
You could say the exact same thing about bonds, so I still think there can be a benefit to holding REITs long term as a diversifier. They may not be as attractive from a short term valuation perspective but I don’t play that game.
This is the point where I can't quite get with the rest of the Bogleheads. Seems to me we are all in the game whether we acknowledge it or not. We have choice whether or not we open our eyes I suppose.
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Re: REITs - Where is the benefit again?

Post by NiceUnparticularMan »

Robot Monster wrote: Fri Jan 28, 2022 11:29 am Are you sure you're just supposed to look at the dividend? I mean, after all, Total Stock Market's dividends don't keep up with inflation, either, yet it's supposedly a good inflation protector, e.g. "Jeremy Siegel says owning ‘real assets’ like stocks is best defense against inflation". Even Vanguard High Dividend Yield Index with its 2.64% 30 day SEC doesn't come close to 6 or 7%.
So when you own productive assets, including real estate but also IP, equipment, labor contracts, and so on, the reason they might track up with unexpected high inflation is basically just that you are hypothesizing that you will be able to sell what they produce for higher prices. And in fact, to the extent you bought those assets with fixed nominal debt with rates implying a lower inflation expectation, then that could work out quite well!

The real world is complicated, though, and lots of things can happen. Maybe the prices you can get are sticky in some way, including if you have given your customers fixed pricing for some period (including in the form of a lease). Maybe your input costs for things you don't already own go up higher than the prices you can charge. Maybe your debt moves to higher rates. Maybe higher inflation is associated with a general economic malaise or recession that reduces demand for your products. And so on.

So yes, in broad theory both stocks and real estate should provide something of an unexpected inflation, and in fact generally in the long run they do to SOME extent.

But it doesn't always work out that way as much or as quickly as one might hope.

That being said, they are obviously a better bet to respond well to unexpectedly high inflation than, say, nominal bonds.
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Re: REITs - Where is the benefit again?

Post by Robot Monster »

loukycpa wrote: Fri Jan 28, 2022 12:04 pm
Robot Monster wrote: Fri Jan 28, 2022 11:29 am
loukycpa wrote: Fri Jan 28, 2022 11:01 am
Kenkat wrote: Thu Jan 27, 2022 7:39 pm 27 days isn’t a lot to base a conclusion on.

Since 2000:

$10,000 in Vanguard REIT index became $109,784
$10,000 in Vanguard Index 500 became $48,191

I owned REIT Index in 2000 and I still own it. It’s worked out well for me.

You can look at some of the additional differences between how the two funds behave here:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Look especially at the Annual Returns section. Sometimes the funds do move together but often when one zigs, the other zags.
Valuation matters though.

In 2000 REITs were yielding 7 or 8% as I recall, well above inflation.

Now in 2022 with REITs yielding 2 or 3%, and inflation running 6 or 7%?

In 2000, sure back up the truck and I'll jump on. Today? Not so much.
Are you sure you're just supposed to look at the dividend? I mean, after all, Total Stock Market's dividends don't keep up with inflation, either, yet it's supposedly a good inflation protector, e.g. "Jeremy Siegel says owning ‘real assets’ like stocks is best defense against inflation". Even Vanguard High Dividend Yield Index with its 2.64% 30 day SEC doesn't come close to 6 or 7%.
S&P 500 companies (the rest other than REITs) pay out maybe 30 or 40% of their operating earnings as dividends. These companies retain most of their earnings and reinvest in their business, buy back stock, etc.

REITs pay out 90%. (Actually with REITs you look more at FFO than GAAP earnings, more relevant).

So yes with REITs the dividends matter more relatively speaking, because it drives more of the return.
That's a good point. So I guess we can say rent increases are not keeping up with inflation, otherwise we'd be seeing much higher dividends? However, I do read that, “even if rent increases are not able to keep pace with inflation in the short term, the property values generally are still increasing.” article source So, perhaps we shouldn't just look at the dividend?
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Re: REITs - Where is the benefit again?

Post by Robot Monster »

NiceUnparticularMan wrote: Fri Jan 28, 2022 12:30 pm
Robot Monster wrote: Fri Jan 28, 2022 11:29 am Are you sure you're just supposed to look at the dividend? I mean, after all, Total Stock Market's dividends don't keep up with inflation, either, yet it's supposedly a good inflation protector, e.g. "Jeremy Siegel says owning ‘real assets’ like stocks is best defense against inflation". Even Vanguard High Dividend Yield Index with its 2.64% 30 day SEC doesn't come close to 6 or 7%.
So when you own productive assets, including real estate but also IP, equipment, labor contracts, and so on, the reason they might track up with unexpected high inflation is basically just that you are hypothesizing that you will be able to sell what they produce for higher prices. And in fact, to the extent you bought those assets with fixed nominal debt with rates implying a lower inflation expectation, then that could work out quite well!

The real world is complicated, though, and lots of things can happen. Maybe the prices you can get are sticky in some way, including if you have given your customers fixed pricing for some period (including in the form of a lease). Maybe your input costs for things you don't already own go up higher than the prices you can charge. Maybe your debt moves to higher rates. Maybe higher inflation is associated with a general economic malaise or recession that reduces demand for your products. And so on.

So yes, in broad theory both stocks and real estate should provide something of an unexpected inflation, and in fact generally in the long run they do to SOME extent.

But it doesn't always work out that way as much or as quickly as one might hope.

That being said, they are obviously a better bet to respond well to unexpectedly high inflation than, say, nominal bonds.
Thank you for the detailed response!
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Re: REITs - Where is the benefit again?

Post by WS1 »

....but aren't REITs now treated like plain ole financial sector stocks and included in the plain vanilla index funds. Doesn't this mean their benefit is baked into the total market's movements?
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Re: REITs - Where is the benefit again?

Post by Northern Flicker »

MeanVarianceOptimal wrote: Fri Jan 28, 2022 4:48 am For those running backtests and calculating efficient frontiers: you need to include bonds in the asset mix for a fair comparison, since REITs have interest rate exposure. When including bonds in a portfolio, REITs have historically offered very little additional diversification.
At 60/40 they effect on risk-adjusted return is diluted so that only a minimal REIT tilt inproved risk-adjusted return since 2010:

https://www.portfoliovisualizer.com/opt ... Weight3=40

But variance and conditional-value-at-risk were both minimized with significant tilts to REITs in the most recent market period of interest to the OP:

https://www.portfoliovisualizer.com/opt ... Weight3=40

https://www.portfoliovisualizer.com/opt ... Weight3=40

What is true is that magnitude of risk reduction at these minima points is not dramatic. I don't tilt to REITs myself.
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Re: REITs - Where is the benefit again?

Post by arcticpineapplecorp. »

abuss368 wrote: Thu Jan 27, 2022 7:07 pm Bogleheads -

Anyone notice that both Total Stock and REIT are down close to the same year to date?

Total Stock - down 9.47%

REIT - down 10.82%

Where is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?
I think there was a large benefit just last year (2021):
vanguard reit went up in 2021 +40.40% compared to total stock market's +25.71%:

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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alex_686
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Re: REITs - Where is the benefit again?

Post by alex_686 »

WS1 wrote: Fri Jan 28, 2022 1:00 pm ....but aren't REITs now treated like plain ole financial sector stocks and included in the plain vanilla index funds.


Where are you getting your information from? What is the bias for this assertion?
WS1 wrote: Fri Jan 28, 2022 1:00 pm Doesn't this mean their benefit is baked into the total market's movements?
No. Why would you think that?

I think your error here is that you think that the most diversified portfolio - as defined as the highest return for the lowest risk - is the market cap weighted portfolio of large publicly traded equities. The arguments for this are weak. On the other hand the arguments against are nuanced and complex where the answer is dynamic. That the question is hard results in many Bogleheads throwing up their hands as saying, incorrectly, that "nobody knows nothing."

Now, a market cap portfolio is a fine, decent portfolio. And it is pretty efficient. But probably not the most efficient.
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Re: REITs - Where is the benefit again?

Post by Northern Flicker »

WS1 wrote: Fri Jan 28, 2022 1:00 pm ....but aren't REITs now treated like plain ole financial sector stocks and included in the plain vanilla index funds. Doesn't this mean their benefit is baked into the total market's movements?
There is a real estate sector that was split off from the financial sector by S&P and CRSP. I'm not sure if MSCI split it off. It is less than 4% of the total market and includes REITs as well as other stocks in the sector (e.g. homebuilders, property managers). I'm not sure whether mortgage REITs stayed in the financial sector or are in the real estate sector.

The rationale for a REIT tilt is that real estate as a share of the economy far exceeds what is captured by the REITs in a total market index, so overweighting REITs better aligns the portfolio with the economy.
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Re: REITs - Where is the benefit again?

Post by alex_686 »

Northern Flicker wrote: Fri Jan 28, 2022 1:09 pm I'm not sure whether mortgage REITs stayed in the financial sector or are in the real estate sector.

The rationale for a REIT tilt is that real estate as a share of the economy far exceeds what is captured by the REITs in a total market index, so overweighting REITs better aligns the portfolio with the economy.
Mortgage REITs stayed in the financial sector.

The primary reason to overweight REITs is that they have a diversifying property. Or you just like making sector bets.

The "If" and "Why" are hotly debated. That real estate is under represented in the total stock market indexes is argument. That they are deeply influenced by their illiquid brethren is a corollary agreement. Their unique tax code is another.
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Re: REITs - Where is the benefit again?

Post by lvm919 »

I expect nothing special from REITs. I do not own them in a large enough increment that diversification/excess return benefits would be dramatic, even if present. That being said, I also don't expect REITs to do terribly over long time periods in comparison to the broader market, and there is always the chance some marginal benefits will show up.

I own REITs because financially, and lifestyle-wise I cannot/should not buy a house or otherwise directly invest in real estate right now. By owning REITs I can tell myself that yes, even though everyone else I know that owns property is sitting on big gains right now, I am also benefiting somewhat, maybe, from rising prices/rents as well.
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Re: REITs - Where is the benefit again?

Post by WS1 »

alex_686 wrote: Fri Jan 28, 2022 1:07 pm
WS1 wrote: Fri Jan 28, 2022 1:00 pm ....but aren't REITs now treated like plain ole financial sector stocks and included in the plain vanilla index funds.


Where are you getting your information from? What is the bias for this assertion?
WS1 wrote: Fri Jan 28, 2022 1:00 pm Doesn't this mean their benefit is baked into the total market's movements?
No. Why would you think that?

I think your error here is that you think that the most diversified portfolio - as defined as the highest return for the lowest risk - is the market cap weighted portfolio of large publicly traded equities. The arguments for this are weak. On the other hand the arguments against are nuanced and complex where the answer is dynamic. That the question is hard results in many Bogleheads throwing up their hands as saying, incorrectly, that "nobody knows nothing."

Now, a market cap portfolio is a fine, decent portfolio. And it is pretty efficient. But probably not the most efficient.
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Re: REITs - Where is the benefit again?

Post by tetractys »

abuss368 wrote: Thu Jan 27, 2022 7:07 pm Bogleheads -

Anyone notice that both Total Stock and REIT are down close to the same year to date?

Total Stock - down 9.47%

REIT - down 10.82%

Where is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?

Since that time period, it appears as if REITs have become more correlated with the overall market. They were separated from the Finance sector of the S&P 500 into their own sector (real estate) in 2016.

Keep investing simple.

Total Market index funds.

Tony
The diversification benefit of REITs had to do with tax treatment and profit payouts to shareholders. Does that still apply?
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Re: REITs - Where is the benefit again?

Post by abuss368 »

Northern Flicker wrote: Fri Jan 28, 2022 1:09 pm I'm not sure whether mortgage REITs stayed in the financial sector or are in the real estate sector.
Mortgage REITs remain in the financial sector. Equity REITs (equity in buildings) moved to the new real estate sector.

Best.
Tony
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Re: REITs - Where is the benefit again?

Post by abuss368 »

tetractys wrote: Fri Jan 28, 2022 5:42 pm
The diversification benefit of REITs had to do with tax treatment and profit payouts to shareholders. Does that still apply?
[/quote]

I think it does as REITs by law must pay out 90% of income.

Tony
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Re: REITs - Where is the benefit again?

Post by abuss368 »

loukycpa wrote: Fri Jan 28, 2022 12:04 pm
S&P 500 companies (the rest other than REITs) pay out maybe 30 or 40% of their operating earnings as dividends. These companies retain most of their earnings and reinvest in their business, buy back stock, etc.

REITs pay out 90%. (Actually with REITs you look more at FFO than GAAP earnings, more relevant).

So yes with REITs the dividends matter more relatively speaking, because it drives more of the return.
GAAP is largely irrelevant for REITs. Perhaps small and mid businesses too but that is another topic to debate. REITs use FFO (Funds from operations) and often AFFO (Adjusted FFO). Problem is in the REITs world, there is an inconsistency in terms of defining FFO and AFFO. The REIT profession is moving towards more clearly defined standards of reporting and consistency in measurement.

Best.
Tony
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Re: REITs - Where is the benefit again?

Post by tetractys »

abuss368 wrote: Fri Jan 28, 2022 5:46 pm
tetractys wrote: Fri Jan 28, 2022 5:42 pm The diversification benefit of REITs had to do with tax treatment and profit payouts to shareholders. Does that still apply?
I think it does as REITs by law must pay out 90% of income.

Tony
Yea so that’s what really separates them as an asset class. They’ve definitely had their moments. Small cap value indexes include a large dollop of REITs, and so a further question might consider that.
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Re: REITs - Where is the benefit again?

Post by abuss368 »

tetractys wrote: Fri Jan 28, 2022 5:55 pm
abuss368 wrote: Fri Jan 28, 2022 5:46 pm
tetractys wrote: Fri Jan 28, 2022 5:42 pm The diversification benefit of REITs had to do with tax treatment and profit payouts to shareholders. Does that still apply?
I think it does as REITs by law must pay out 90% of income.

Tony
Yea so that’s what really separates them as an asset class. They’ve definitely had their moments. Small cap value indexes include a large dollop of REITs, and so a further question might consider that.
That is my understanding. REITs and Small Cap Value have some similarities. Small Cap Value holds a material amount of REITs.

Best.
Tony
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Re: REITs - Where is the benefit again?

Post by Northern Flicker »

The midcap sector has a slightly larger percentage of REITs than the small cap sector, but they are close, so the comparison will depend on where you slice the market.
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Re: REITs - Where is the benefit again?

Post by Nate79 »

abuss368 wrote: Thu Jan 27, 2022 7:07 pm Bogleheads -

Anyone notice that both Total Stock and REIT are down close to the same year to date?

Total Stock - down 9.47%

REIT - down 10.82%

Where is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?

Since that time period, it appears as if REITs have become more correlated with the overall market. They were separated from the Finance sector of the S&P 500 into their own sector (real estate) in 2016.

Keep investing simple.

Total Market index funds.

Tony
Come on Tony. My Fundrise portfolio YTD return is 0% with the individual funds in the portfolio between -0.3% and +0.3% YTD. :sharebeer
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Re: REITs - Where is the benefit again?

Post by abuss368 »

Nate79 wrote: Fri Jan 28, 2022 7:34 pm
abuss368 wrote: Thu Jan 27, 2022 7:07 pm Bogleheads -

Anyone notice that both Total Stock and REIT are down close to the same year to date?

Total Stock - down 9.47%

REIT - down 10.82%

Where is the diversification benefit? Has there been one since a the 2000 tech bubble where REITs outperformed?

Since that time period, it appears as if REITs have become more correlated with the overall market. They were separated from the Finance sector of the S&P 500 into their own sector (real estate) in 2016.

Keep investing simple.

Total Market index funds.

Tony
Come on Tony. My Fundrise portfolio YTD return is 0% with the individual funds in the portfolio between -0.3% and +0.3% YTD. :sharebeer
Awesome Nate. Did they pay any dividends yet?

Do you also invest in Vanguard REIT?

Tony
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Re: REITs - Where is the benefit again?

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