Should I diversify into REITs?

I thought I’d poke around online and read about some ETFs today and look for a suitable one for my Ameritrade account since I am just keeping $2k in there so I can have real-time quotes (part of this month’s goal).

I have thought about investing in REITs for a while, as I don’t own a house yet and would like to have a piece of the (crazy) real estate market while I am waiting. However, I also feel that interest rates will rise sharply this year and the next, hurting potential returns. Real Estate Bubble?? Who knows, but a little diversification never hurt anyone, right?

After my own previous reading and running across this TheStreet.com article and this CBS Marketwatch article, here are some pros and cons of REITs:

Pros: diversification, decent yield (at least in recent history), low correlation with stocks, much more liquid that actually buying real estate, many investment theories say that it should be chunk of your portfolio.

Cons: sensitive to interest rates, can be volatile, sensitive to interest rates, no favorable dividend treatment like stocks, some smart people like Bogle say that you are already getting your weighted share of REITs in a market index fund.

I still feel like a latecomer to the party after the beer is almost gone, but if I do go with REITs I am leaning toward VNQ from Vanguard and the streetTracks Wilshire REITRWR. VNQ offers a relatively diversified REIT VIPER (of VGSIX) with a characteristic low expense ratio of 0.21%. RWR has only 92 REITS in it’s portfolio vs. VNQ’s 121, and has a slightly higher expense ratio of 0.28%.

I have about $2400 in my Ameritrade account, which is 4% of my total net worth, and 6.9% of my retirement money if I include it as such. I feel that is a good percentage, and not too little and not too much. Comments welcome!

Comments

  1. TAREX

    Invests more in common stocks than in REITs, but still gives plenty of REIT exposure. Emphasis is on value. My favorite mutual fund.

  2. Check out VNO – Vornado Realty. Solid stock, company and management.

  3. I’m looking into REITs too. I do have a few funds but think I will go for an index fund as my core first. I feel the same way that the train may have come and gone on REIT returns. We’ll see…

  4. I’ve long been considering adding REITs to my portfolio, specifically VGSIX. But I’ve been holding off since I’m also worried about a possible real estate bubble (and besides, I already own my home, a condo).

    Also, a significant portion of REIT dividends (return on capital) are not taxed as income, but as capital gains, which is a lower rate.

    BTW, while I am very grateful to Bogle for what he’s done for the index fund industry, I’m not really convinced he’s all that smart. I found quite a few problems in his book. Burton Malkiel, who I think is a LOT smarter, recommends about 10% in REITs for most investors.

    But you might want to hold off. First diversify into international equities first (like EFA and EEM) and bonds if you haven’t already. Just my $0.02.

  5. I like AIGYX for my REIT mutual fund. I also own shares of SFI and NLY directly.

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