Should you include Reits in Your Portfolio? And if so, which ones?
Many investors have real-estate investment trusts in their portfolios because they provide exposure to the real-estate market without having to buy property directly. But which of the many types of REITs on the market have performed best over the long run, and do they provide the housing-like returns investors seek?
To study this issue, my research assistants (Alice Nguyen and Diego Alcantara Leon) and I pulled all REIT mutual funds and exchange-traded funds that are publicly listed on U.S. markets. We then separated our REITs into five broad categories—commercial; infrastructure; residential; data-center-focused; and general, where all types of REITs are packaged in a single product. We then collected the average return, including dividends, for all REITs over five years and 10 years and measured their average volatility, or the standard deviation of returns, over the past five years.
The first interesting finding is that over a five-year horizon, general REITs and data-center REITs have had the greatest average returns, yielding 15.18% and 15.57% a year, respectively. As for risk over this period, the general REIT category averaged a relatively high volatility of 21.52% and the data-center REIT category averaged a volatility of 21.20%. To put this in perspective, the S&P 500 delivered a 15.89% return a year over the same period, with lower risk (18.63% volatility).
On the other end of performance, we found that commercial REITs fared the worst over the past five years, with an annualized return of 7.83% a year and the highest risk as well (25.62% volatility).
When we look at the 10-year horizon for volatility and returns we see similar rankings of all REITs as when we looked at the five-year horizon. Again, general
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