- The morphing of equity REITs from a niche to a widely accepted and favored asset class has diminished the likelihood of outsized performance going forward, writes Morningstar's Samuel Lee. For decades, REIT yields averaged in the area of 7%, but a "regime shift" about 10 years ago has settled them down closer to 4%.
- Further, another benefit of REITs - their lack of correlation with the broader market - has disappeared, says Lee, with their average market beta of 0.5 moving to more than one in the early 2000s, and staying there ever since.
- "Anyone who buys REITs on historical risk/return characteristics without considering the fundamental drivers of return and potential changes to market structure is being reckless. A deeper look strongly suggests that REITs' diversification powers are down and so are their expected returns."
- Lee has two suggestions for those looking for an inflation hedge: Cash - the Fed typically raises short-term rates inline with increases in inflation - and conventional equities.
- Related ETFs: IYR, VNQ, REM, DRN, REZ, URE, SRS, RWR, ICF, SCHH, DRV, ROOF, KBWY, RTL, REK, FRI, FTY, PSR, FNIO, WREI
REITs' value called into question
Dec 31 2013, 10:43 ET