I am curious about your take on REIT etfs at this stage. It seems to me that as a group they have been overly beat down because of the sub-prime mess and perhaps the coming of the long awaited slow down in the economy. It avoid single stock risk, i have been thinking of putting a toe into this catagory of stocks. Any thoughts? Any best of breed insights?
A lot of people love REITs. You can find recommendations out there suggesting as much as 15 or 20% in REITs. If you do a search for lazy portfolios you will see various suggested weightings there as well.
REITs are an asset class, like most asset classes there are periods where they do very well. I think there is an element of REITs being too adored, people owning too much and the declines being very big when they happen.
The one REIT I own across the board has been hot very hard but not noticeably harder than other REITs. I have 2-3% allocation depending on the client which I consider an underweight.
One of the benefits of REITs is the low correlation to equities. iShares has two domestic REIT ETFs with long track record; IYR and ICF. According to PortfolioScience.com IYR has 0.758 correlation to the S&P 500 and ICF has 0.701 correlation. That isn't that low. There is a closed end fund that invests in Asian real estate with ticker RAP that has a 0.486 correlation which is a little more like it. The one REIT I own has a 0.658 correlation, remember an ETF is likely to have a higher correlation than an individual name.
I am considering taking a tax loss on the one REIT I have and swapping it for something foreign, but not RAP. The logic behind possibly going foreign is the desire for a lower correlation.
The question seems to have a short term element to it. I don't doubt that the decline in REITs is more than what us justified but to the extent they are guilty by association more decline would not be shocking. I said before I am not in a hurry to add financial exposure until the yield curve normalizes and it seems that the abnormal curve may have played a role in the REIT decline too.
Well there certainly appears to be a tight correlation there.On something like this I think I would need to have a fundamental justification for increasing exposure. Changing it, as I plan to do, is a different matter. It is an asset class and I believe some exposure is warranted in the interest of maintaining a diversified portfolio.
18 comments:
There was a ruling on ETNs that seems to deflate their tax advantages over etfs. I never bought any ETNs, and don't really understand them, but I wonder if you see this has any fallout for income investors?
basically ETNs own nothing. they are simply a promise that the fund will mimic that which it is supposed to mimic and structured as a debt instrument.
Most of the ETNs are commodoity or currency related and none of them, that i am aware of, pay any dividend or interest so i am not sure the tax ruling has an impact on income investors as asked.
i am not sure what if any impact there will be. if one thinks the rogers commodity ETN is the best exposure would the change in tax treatment become more important? for some yes and for some no.
Nueoff,
I believe the specificity of your comment creates a compliance issue for me. I have deleted your original comment and reposted w/o the ticker symbol.
"Here is another thought for the original reader: Instead of buying an ETF, he could invest in an actively managed fund. This strategy offers wide diversification and it would facilitate accumulation of shares over a period of years, to take advantage of current and possible future price weakness. Start with a relatively small initial investment of $3K now, followed by accumulation of additional shares at the rate of perhaps $100 a week over a period of several years. During the accumulation phase you will be diversifying your portfolio, and when the turn comes you will be positioned to profit. In the meantime, you collect a generous dividend yield."
FWIW, this reader thinks that REITs have gotten tarred with the broad real-estate-is-lousy brush. Traders bailed when Sam Zell sold and investors are finally selling beaten down shares for tax losses. For patient investors, I believe this has created a great opportunity to pick up income generating assets. I've done so using a U.S. ETF and a deeply discounted international CEF.
Roger,
I understand your difficulty with compliance issues, but for the record, the fund I suggested is not actively managed - it is a REIT index fund. I quote from the provider's web page: "The fund normally invests at least 98% of its assets in stocks issued by equity real estate investment trusts (known as REITs) in an attempt to parallel the investment performance of the MSCI® US REIT Index. The fund invests in the stocks that make up the index; the remaining assets are allocated to cash investments."
Nueoff
thank you for taking the time to clarify.
I have a global reit with this correlation.
Standard Index Best Fit Index
S&P 500 TR DJ Wilshire REIT
R-Squared 51 81
Beta 1.28 0.73
Alpha 7.15 7.92
I think that doing appropriate research and selecting well-positioned REITs is better than the index approach. Look carefully at the class of real estate in the REIT. There is a large gulf between good REITs with a nice yield and REITs with assets entangled in the equivalent of realty manure.
I agree that REITs with the "right stuff" are very attractive investments at present.
NAREIT puts out a monthly REITWatch with more charts and tables you would ever want on US REITs and sectors.
http://www.nareit.com/library/performance/reitwatch.cfm
Paul
Thanks for the link Paul.
Here's another one that some may find useful:
http://www.investinreits.com/index.cfm
Way OT, Roger:
Do you think that the Fed's obvious slant towards bailing out Wall Street instead of the dollar will cause further decline for the dollar next year?
Check out CGM Realty. An OEF that can invest outside of real estate.
Here is some news that ought to get everyone's attention:
UBS, the giant Swiss bank, wrote down another $10 billion in subprime-related paper today and sold a chunk of itself to Singapore and Middle Eastern investors. The WSJ quoted the bank as saying, "The ultimate value of our subprime holdings...remains unknowable." That is a scary, and probably accurate, description. If this is a sign of the financial system coming unglued, it is also "unknowable" when things will be straightened out (and how). Wow
Norm G.
Larry,
You, of all people, cannot be that specific on this site. Having the seem name will lead to people adding 1+1 and getting eleven.
Rates ( interest rates ) have gone down for the last ...oh...20-25 years, creating the biggest bull market in bonds and....you guessed it--REITS.
What happens when rates go up?
Yes...you know. Bonds and REITS go DOWN.
Wake up America.
But, rates are going down and when they go up I will agree with you.
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