The One-Year Return on a REIT Total Return Index: 13.25%

By Karl Cates and Kevin Sullivan | July 17, 2012
  • What's Happening

    What's Happening

    In the quest for yield, more investors are turning to real-estate investment trusts, or REITs -- diversified real-estate securities that trade like stocks. What's inciting interest is the 13.25 percent return over the past year on the Dow Jones U.S. Select REIT Total Return Index, an industry benchmark. That compares with the 5.2 percent return on the S&P 500 index. Expectations for the future have also helped REITs. According to Bloomberg's survey of economists and strategists, U.S. GDP growth should exceed 2 percent from 2012 to 2014 and the unemployment rate will taper toward 7 percent in 2014.

    Photograph by Scott Eells/Bloomberg

  • Why It Matters

    Why It Matters

    REITs can provide a fairly reliable source of income. Today they yield about 1.6 percent more than 10-year Treasuries. REITs, over time, have also shown a low correlation with the stock market, indicating that they offer good portfolio diversification. In the post financial crisis, however, the correlation has been tested as almost all assets have shown gains. REITs also provide further diversification beyond what you may already own in real estate since an investment in a single house or an apartment building is not a diversified asset. REITs, however, pool investor money into various real-estate holdings, such as apartment buildings, shopping malls and storage facilities.

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    The performance of REITs is influenced by interest rates. When rates go down, as they have in recent months, REIT prices typically go up because of their lofty yields but also because low rates are good for real estate. Conversely, rising rates are generally not good for REITs because the real estate industry depends so much on financing costs. The Bloomberg survey's median forecast for the 10-year Treasury rate is for it to rise to nearly 3 percent by the end of 2013 from less than 1.5 percent today. While that's not a big increase, if rates do rise, REITs may not perform as well as they have over the past several months.

    Photograph by Erin Lubin/Bloomberg News

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