Real Estate Investment Trusts, or REITs as they are commonly known, are finally getting a spot in the starting lineup. The S&P500 is giving REITs their own industry group. Previously they were a part of the Financial industry in the index.
REITs allow investors to invest in real estate, without all the hassle and costs associated with maintenance. They are also much easier to invest in, as they trade on exchanges just like stocks. REITs can also have attractive yields for income focused investors, making them a relatively safe (but still volatile) alternative to bonds. However, while we like REITs and use them in our portfolio’s, it’s important to remember not to overweight them despite their positive attributes. If you already are heavily invested in real estate, such as owning your own home, you should only allocate a small portion of your portfolio to REITs. Should the housing market face a downturn, you would be facing losses to your portfolio and your house. Diversification is still key to a well balanced portfolio.
This is the first reconfiguration of the S&P500 index since 1999, when the technology sector was broken out from industrials. REITs have become extremely popular in recent years, as investors look to diversify their holdings with real estate, long known to be a hedge against inflation. This popularity led many to claim that REITs could stand on their own, separate from banks and insurance companies that make up the financial sector. A knock-on effect of this to be aware of, is that financial sector funds (ETF or mutual) will have to remove the REITs from the fund. This will likely lower the yield due to REITs typically having higher yields than banks or insurance companies.
Welcome to the big leagues, REITs.