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Investing Made Simple - Real Estate (REITS)

Investing Made Simple - Real Estate (REITS)
Your plan’s investment menu includes the Vanguard Real Estate Index, an index mutual fund that invests in a diversified portfolio of “REITS” or real estate investment trusts. REITS are investment companies which own and rent out commercial real estate, such as office buildings, industrial and research parks, shopping plazas and residential projects.
You can check out information on the fund by clicking this link. This fund provides inexpensive, diversified exposure to the entire REIT market. It is included in your plan’s model “Target” allocation portfolios, but it also can be selected by “do it yourself” investors.
REITS play a diversifying role in a portfolio and, for most people, should represent a modest slice of the portfolio. Over the long run, REITS have provided positive returns comprised of a combination of rental income passed through to investors, and capital appreciation related to rising rents and property prices. For that reason, REITS are thought of as inflation hedges over the long run (note the emphasis). They provide diversification precisely because they can and do tend to perform independently of stocks or, more aptly, at different phases of the economic cycle.
That has been apparent recently as REITS have lagged the rise in stock prices over the last year. While REITS should ultimately benefit from a faster growing economy and from rising rents, in the short run, they are interest rate sensitive. That means the sector tends to perform poorly when interest rates increase, partly because REITs’ borrowing costs may rise, and partly because it creates marginal selling for much the same reason that bond prices decline.
Here is a short video from the folks at Investing Made Simple explaining “What is a REIT? – How Rising Rates Affect REITS”
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