In a few days I'll be providing a list of my Top 10 REITs to own in 2016.
As you can see from my disclosure, I own more than 10 REITs now and part of my job as a REIT analyst is to filter out the best companies to own with a goal of providing durable income and reliable share price appreciation.
I often get asked, "How many REITs should I own?"
My typical reply is, "More than one and not more than twenty-five."
I then explain that real estate is an uncorrelated, inflation-linked asset class that complements a multi-structured portfolio offering diversification, potential risk reduction and return enhancement.
By utilizing REITs - superior vehicles for investing - these favored dividend stocks provide for differentiation due to their liquidity, transparency, and total return characteristics. Additionally, public REITs enhance overall portfolio diversification by geography, sector, strategy, property, and tenant.
Looking back over the last eleven months, I can cite quite a few examples where diversification has been a life saver. Just a few days ago, CorEnergy (NYSE:CORR) dropped hard from around $25.00 per share to $16.64, and because I own a limited number of shares, I was able to mitigate the volatility by staying within my small-cap rule (no more than 2% of any small-cap REIT in my REIT portfolio).
Part of my investing strategy is to own an over-weight percentage of blue chip REITs; that's the reason you see Ventas, Inc. (NYSE:VTR), Realty Income (NYSE:O), Tanger Factory Outlets (NYSE:SKT), and Welltower (NYSE:HCN) listed in my disclosure tab. While the smaller, lesser-proven REITs offer enhanced share price appreciation, they can be equally unstable because of their thinly-traded attributes.
In my upcoming newsletter (Forbes Real Estate Investor) I decided to provide my subscribers with a bi-annual REIT ETF Guide in which I will examine a wide universe of REIT ETFs, extolled as a way to quickly diversify a portfolio, and reduce volatility.
Recognizing that most financial professionals know there are benefits to diversification, but also understand the rewards are not limitless. At a certain point, the volatility reduction becomes minimal and the portfolio begins to lose expected return - a concept known as the volatility trumpet.
Peter Lynch, one of the greatest investors of all time, calls this "di-worse-ification."
By purchasing the ETF, an investor has conceptually di-worse-ified a portfolio. Most of the time, an active investment manager can avoid holding the universe of an index, and invest in REITs that are the best in class and provide the greatest return.
But, REIT ETFs have their place. For select managers of niche strategies, they provide unique ways of gaining exposure to the market or specific sectors in a cost effective manner. They are useful for sophisticated hedging strategies, as the manager can target a specific source of risk in a portfolio. Consequently, tradability and liquidity allow for easy entrance and exit for investors seeking short-term market exposure.
The Best REIT ETF in 2015
As I said, I am including a comprehensive review of around 20 REIT ETFs in my upcoming newsletter. I think you will find this edition of interest as I compare the various ETFs based on dividend yield, expense ratios, company concentration, total assets, volume, and total return, among other attributes.
Strikingly the best REIT ETF in 2015 (through November 30, 2015) is iShares Residential (NYSEARCA:NYSEARCA:REZ). More interesting is that REZ is the least diversified REIT ETF that I examined with just 66.77% concentration within the top 10 holdings. While most of the participants are residential (or self-storage) related, the portfolio does include a number of healthcare REITs (that have under-performed in 2015).
The top 10 REITs owned by REZ include Public Storage (NYSE:PSA), Equity Residential (NYSE:EQR), AvalonBay (NYSE:AVB), Welltower, Ventas, Inc., Essex (NYSE:ESS), UDR Inc. (NYSE:UDR), Extra Space (NYSE:EXR), HCP, Inc. (NYSE:HCP), and Mid-America (NYSE:MAA).
The expense ratio for REZ is 48 basis points and the ETF is smaller than most with just around $320 million in assets. It's likely that REZ has outperformed the other ETFs because of the substantial concentration (modest diversification) and the fund's focus on apartments and self-storage. REZ is currently trading at $60.81 per share with a dividend yield of 3.26%. The Total Return YTD (through November 30th) is 7.20%.
As the chart above illustrates, REZ generated most all of the success with the residential and self-storage REITs. If REZ would have eliminated the healthcare exposure, the YTD performance would have been double digit. The SNL Equity REIT Index returned -.96% YTD and the S&P 500 returned -.27% YTD.
One of my favorite quotes is by Sir John Templeton:
The only investors who shouldn't diversify are those who are right 100 percent of the time.
Sir John coined "the world's greatest stock picker of the century" by Money magazine was only right 66 percent of the time. So if the greatest stock picker in the world needs to be diversified to protect against losses, the average investor can surely benefit from the practice of diversification too. As a huge proponent of diversification, as he explained (in July 1949):
Diversification should be the corner stone of your investment program. If you have your wealth in one company, unexpected troubles may cause a serious loss; but if you own the stocks of 12 companies in different industries, the one which turns out badly will probably be offset by some other which turns out better than expected.
Source: Yahoo Finance
REIT ETF Tracker: I plan to include a real-time REIT ETF tracker for my iREIT Forbes premium members.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circ*mstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Brad Thomas
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.
Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn more
Analyst’s Disclosure: I am/we are long O, DLR, VTR, HTA, HCP, STAG, GPT, ROIC, HCN, OHI, LXP, KIM, WPC, DOC, EXR, MYCC, BX, TCO, SKT, UBA, STWD, MPW, CONE, BRX, CLDT, HST, APTS, FPI, CORR, NHI, CCP, WSR, CTRE, WPG, KRG, SNR, LADR. 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.
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