In case you’re new to REITs, they’re a type of security that invests in real estate and trades on major exchanges just like a stock does. They receive special tax considerations and usually offer high yields. It’s those high yields that attract most investors looking for income, however we like REITs for an entirely different reason. REITs do not typically follow the stock market in regards to their returns, in fact, the longer you hold REITs the less likely their returns correlate to the market as seen below:
Why should we find this appealing? Well because if the returns of REITs do not follow the general market, then they will help provide diversification that will help offset the effects of any general market turmoil your portfolio may be undergoing. Now lately, we’ve been seeing a good example of how returns between the market and REITs are uncorrelated. Let’s take a look at the 3 REITs were holding compared to the returns of the S&P500 over various time frames:
As we can see, the returns for our 3 REITs have decimated the market over the past year. That’s pretty interesting right? Even though the S&P500 has stagnated, REITs are on a tear. Now with the threat of interest rates rising, we went through these 3 REITs a while back to make sure none of them has any sort of “variable rate” exposure that would cause them to blow up when interest rate increase. We didn’t see any issues in that respect. REITs traditionally go south when the talk of rising rates comes up. Could it be everyone thinks rates aren’t likely to rise for a long time?
Now the one event that’s coming up which may affect REITs is that soon they will have their own GICS sector. For those of you unfamiliar with GICS, it stands for “Global Industry Classification Standard” and it is used to classify companies into buckets according to the type of business they are conducting. GICS has 10 sectors currently, but in September of this year will add an 11th sector specifically for REITs. Since many firms offer sector based ETFs, we would expect this would have a positive impact on the price of REITs. Maybe that’s what we’ve seen priced in already in the last year?
Another reason for the meteoric rise of REITs could be that investors are starving for yield. At this point in time, each of these 3 REITs is nearing a 10-year low for yield:
As for the REITs we’re holding in the QQQQ, they’ve been our best performing assets to-date. Here’s where we stand based on positions we’ve been accumulating over time using dollar cost averaging:
While we’re tempted to tell you that because of our advanced degrees in finance and rugged real world experience in the trenches of the finance world that we saw this one coming and capitalized on it, we didn’t. We just used dollar-cost-averaging to build positions in our REITs over time that we plan to hold indefinitely. So does this mean now we go hold a pow-wow on Seeking Alpha and let everyone else convince us that we should try and time the market and sell our positions? Absolutely not. We do what our Quantigence objective methodology tells us to do. Nothing. As a rule, we only ever sell a stock we own if it stops growing our income stream. In the meantime, if you have a better idea as to WTF is going on with REITs these days, drop us a comment below.