Adding real estate to your portfolio can provide greater diversification, plus a potential for growth, but it can be tricky. That’s why some investors choose real estate investment trusts (REITs) instead.
REITs are securities that invest primarily in income-producing real estate or make loans to persons involved in the real estate industry. Investors earn income derived from rents or profits from the sale of properties in the REIT’s portfolio. REITs generally trade on a major stock exchange.
Many investors consider REITs for their historically low correlation with other asset classes. That is, they tend to perform differently from stocks, bonds, and cash.
For example, year-to-date through June 30, 2014, the MSCI U.S. REIT Index has returned 16.78 percent compared to 7.14 percent for the S&P 500 Index (U.S. stocks), 3.93 percent for bonds (Barclays U.S. Aggregate Index), and 1.4 percent for cash (Barclays U.S. Treasury Index).
Another option is a global REIT. The U.S. is not the only country with a REIT market, and many investors interested in REITs are looking overseas. Global REITS, as measured by the FTSE EPRA/NAREIT Developed Index, returned 12.21 percent year-to-date through June 30, 2014.
Of course, investing in foreign securities presents unique risks, such as currency fluctuations, political and economic changes, and market risks. These factors may result in greater volatility, so it’s a good idea to consult an advisor before investing in an alternative product such as REITs. He or she can help you determine if REITS are right for you based on your individual financial circumstances and goals.