With long-term Treasuries still yielding well below 3%, investors have been left to look for yield in less than conventional places.
Real estate is often one of those places. Investing directly in land and properties can be costly and complicated, but real estate investment trusts, or REITs, make it accessible to regular investors. Adding real estate to a broader portfolio offers a way to add diversification, hedge against inflation risks and potentially earn high dividend yields.
In case you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio.
What is a REIT?
A REIT is essentially a company that owns or finances real estate properties. These properties collect rent from their tenants and pass that income on to the REIT’s shareholders in the form of dividends. Much like how an equity mutual fund may own dozens of stocks, REITs own dozens of properties. Many REITs are generalized and can own all different types of properties, but others focus on narrower segments of the market, such as commercial properties, office buildings or hospitals. REITs are popular among income-seeking investors because they are required to pay out at least 90% of their income to shareholders as dividends.
Check out our guide to real estate funds here.
Why Might Investors Choose REITs?
In addition to higher than average yields, REITs do a good job of filling out a portfolio. For a long time, real estate was considered a subgroup of the financial sector. Recognizing real estate’s place in the global economy and understanding that it didn’t operate like a traditional financial services business, both S&P and MSCI spun off real estate from the financial group and gave it its own sector classification.
Many advisors acknowledge that real estate belongs in many portfolios thanks to its above average yields, low correlation to other asset classes and overall risk-reducing benefits. REITs can also be used as a way to play certain economic trends. For example, the aging of America has put healthcare companies and the services they provide in high demand. Investors looking to capitalize on that trend may want to check out healthcare REITs, which typically invest in senior living communities, medical office buildings, hospitals and nursing facilities.
Five Highly Rated REIT Mutual Funds
If you’re considering adding a real estate fund, you should look for the same things that you do with any other fund – low expenses, diversification and a lack of excessive risk. These five funds would be ideal choices to add to your portfolio.
|Name||Ticker||Expense Ratio||AUM *||YTD Return *||3 Year Avg Return *|
TIAA-CREF Real Estate Securities Fund
Fidelity Real Estate Investment Fund
Vanguard REIT Index Fund
Cohen & Steers Realty Shares Fund
DFA Real Estate Securities Fund
*As on October 12, 2017
Each of these funds has billions of dollars in assets, so liquidity and tradability are high. Vanguard, not surprisingly, is one of the low cost leaders, although the DFA Real Estate Securities Fund is even cheaper. All have produced returns in the 9-10% range, putting them nearly on par with the S&P 500. Real estate funds have been riskier than the S&P 500 over the past several years, but their low correlation with other equity sectors has made them better fits in a broader portfolio.
Key Considerations for Investors
Real estate funds are great for investors because they provide easy access to a segment of the market that is sometimes difficult to enter. They can be purchased at a relatively low cost, and come with the potential for capital appreciation in a rising real estate market to go along with the higher dividend yields.
On the other hand, real estate can be negatively impacted by rising interest rates. If there is a prolonged lack of demand in rental properties or the ability to charge and raise rents, REIT funds will likely underperform.
The Bottom Line
Real estate investing has become commonplace in today’s financial markets, and REITs have become the go-to vehicle to access the sector. REITs are liquid, are easy to trade, offer solid dividend yields and provide risk-reducing diversification benefits. Any one of the REIT mutual funds listed above would be a great option for investing in this space.
Be sure to check our News section to keep track of recent fund performances.