Real Estate Investment Trusts (REITs) are often viewed as alternatives, though Morningstar doesn’t characterize them as such, since they are now mainstream. Though private, non-traded REITs have very high loads and ongoing expenses, low-cost REITs can have a place as alternatives in our clients’ portfolios.
REITs performed spectacularly during the internet bubble but, of course, horribly during the more recent real estate bubble. How they will perform during the next market downturn is anyone’s guess. However, a recent 10-year forecast by Vanguard predicts REITs will earn an expected 6.2% annually with a 14.2% standard deviation. This compares to an expected return for U.S. equities of 7.7% annually with a 17.2% standard deviation. The real benefit from REITs comes from their lower 0.6 correlation.
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