My position on REITs has been same for a long time. Most clients own Equity Residential (EQR), EOP's cousin, which I first disclosed about a year and a half ago. A few clients less tolerant of stock market volatility own a second REIT.
Sometimes I see or hear commentary that lumps REITs in with the homebuilder stocks. This chart of EQR (as a proxy) compared to the Homebuilder SPDR (XHB) shows a very low and often negative correlation between the two.I have never thought there was much of a fundamental connection but you can judge for yourself.
In addition to what I think is a fundamental difference there is also a difference in sentiment. Hot money seems to love to chase the homebuilders while REITs attract more staid capital. REITs, kind of like the Canadian income trusts, can create a false sense of security. REITs have utility and have a place in a diversified portfolio but too much of anything is not a good idea. REITs had a rough run during the bubble years and they will have rough runs in the future.
Should you have exposure? Probably, but 20%? Not for me.
6 comments:
http://millionairenowbook.blogspot.com/2006/11/tale-of-two-markets-revisited.html
Roger,
Do you have a POV on foriegn REITs?
TomK
I wrote a skepitcal piece on the RAP CEF for TSCM. As you may know there are several products in the work to capture this space which I will certainly explore when they come.
I know there are a couple of OEFs but with only having studied RAP I wonder if this part of the market could be better owned with an individual stock but I don't think there are any NYSE listings, only pink sheet of that.
If anyone can offer otherwise please do.
Countries with hot RE markets that I know of are Australia, UK, Ireland, Hong Kong and maybe Japan? Not sure about Japan.
Here's a chart of the relative performance of RWR (REIT ETF) over the SPY (S&P500 ETF). It's obvious that REITs and Homeys move in different directions. Consider that REITs as a class can include office buildings, shopping centers, apartments, hospitals, and all kinds of real estate, whereas Homeys are Homeys, and it's intuitively obvious that they shouldn't trade together.
http://www.billakanodoodahs.com/wp-content/uploads/200611/nt24.png
I hate that SA has their own comments and not a redirect to your comment thread, so I repeat it here:
Perhaps it's a theoretical issue that REIT ETFs merge residential and commercial classes; I haven't attempted to verify or disprove that any particular REIT ETF does or doesn't. I also don't read the War Street Urinal.
Regardless, it's a simple fact that RWR, a REIT ETF, regardless of its composition, has shown considerable outperformance over the broader market in terms of appreciation. This is not a new trend, it is a trend that goes back for several years and was unaffected - totally unaffected - by the collapse of homebuilding stocks. As long as the price is going up, shorting it is stepping in front of a moving train. It would seem to me that going from 80 to 90 in two months would outweigh the difference in yield from money markets to dividends.
technically speaking RWR is a closed end fund not an ETF.
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