Why You Shouldn't Buy RQI

Summary

• Investors are often seduced by high-yielding closed-end funds.
• RQI is commonly recognized as the gold standard of REIT closed end funds.
• Yet, we don't see the appeal. It's overleveraged, suffers from closet indexing, and charges excessive fees.
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Investors have three main options when investing in REITs:

• (1) They can invest in an exchange-traded fund.
• (2) They can invest in a closed-end fund.
• (3) Or they can invest in individual REITs and build their own portfolio.

A growing number of investors pick the second option. CEFs allow you to gain passive and diversified exposure to the REIT sector with the added benefits of active management which could lead to higher total returns.

The idea is great in that a CEF can combine the best of passive and active investing by allowing you to earn the superior returns of active investing without having to lift a finger. It's a good pitch that attracts a lot of investors.

In reality, the results have been very disappointing, even for the highest-quality REIT CEFs. Cohen & Steers Quality Income Realty Fund (RQI) is commonly recognized as the gold standard of REIT CEFs. Yet, it has historically delivered lower returns with higher risk than passive REIT ETFs.

RQI returned 7.7% per year compared to 9.1% per year for a passive REIT benchmark since inception. Even more disappointing is that RQI achieved these inferior results despite taking higher risks:

source

Below we explain three reasons why RQI failed investors and why we are not buying it:

Reason #1: Excessive Leverage

A lot of individual investors get seduced by RQI and other CEFs because they pay much higher dividends than ETFs.

However, it's important to understand how they achieve this higher yield. The “secret” here is leverage. RQI has a 25% leverage ratio. This leverage comes on top of the leverage that REITs use themselves. It essentially adds a second layer of leverage.

And if there's anything to learned from past bear markets, it's that overleverage mixes very poorly with REIT investments. RQI dropped as much

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.