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Four Reasons to Invest in REITs

Real estate investment trusts (REITs)—typically publicly traded companies that finance or own real estate—are prized for the income they provide. That’s because by law REITs must pass along at least 90% of their income to shareholders as dividends.

Critics believe REITs are poor investments during periods of increasing interest rates, when rising yields from fixed income investments make REITs—which are riskier—less attractive. They may have a point: REITs generated their lowest returns in a decade in 2018, a year in which the Federal Reserve raised rates four times. (Distributions from REITs are also taxable, unlike some fixed income investments.1)

That said, we believe short-term underperformance is rarely sufficient reason to jump ship, whatever the investment. And despite last year’s paltry returns, REITs actually outperformed several other asset classes, including U.S. stocks.

The case for REITs

Here are four reasons why REITs might deserve a place in your portfolio:

  1. Diversification: REITs rarely perform in lockstep with stocks or bonds. In recent years, the divergence was partly the result of low interest rates, which caused yield-hungry investors to drive REIT prices higher. Additionally, REITs tend to follow the real estate cycle, which typically lasts a decade or more, whereas bond- and stock-market cycles typically last an average of roughly 5.75 years.2
  2. Income: In 2018, U.S. REITs yielded 4.68%, outpacing most other income-generating investments (see “REITs returns,” below).
  3. Inflation hedge: Real estate has tended to fare well in the face of rising prices. In particular, REITs with commercial holdings frequently have agreements that allow them to raise rents in tandem with inflation.
  4. Long-term growth: Past performance is no guarantee of future returns, but U.S. REITs have outperformed U.S. stocks in seven of the past 10 years.3 Globally, real estate investments outperformed equities by an average of more than a full percentage point per year from 1960 through 2015.4


REIT returns

Last year, REITs yielded more than most other income-generating investments.

Source: Schwab Center for Financial Research. Asset classes are represented by the following: Alerian MLP Index (master limited partnerships), Bloomberg Barclays U.S. High Yield Very Liquid Index (high-yield corporate bonds), S&P U.S. REIT Index (U.S. REITs), Bloomberg Barclays U.S. Credit Index (corporate bonds), MSCI EAFE Index (international stocks), Bloomberg Barclays U.S. 7–10 Year Treasury Bond Index (Treasuries), S&P 500® Index (U.S. stocks), and Bloomberg Barclays Global Aggregate ex-USD Total Return Index (global bonds). Past performance is no guarantee of future results. Indexes are unmanaged; do not incur management fees, costs and expenses; and cannot be invested in directly.


Investing in REITs

As with stocks, it can be difficult to consistently make successful choices when investing in individual REITs. Therefore, investors might be best served by an exchange-traded fund or a mutual fund that tracks a broad-based REIT index, such as the MSCI U.S. REIT Index or the S&P U.S. REIT Index.

And because REITs tend to be volatile, they should constitute no more than 5% of your portfolio. However, even that small allocation can help capture a degree of diversification, growth potential and income that would be tough to replicate with any other asset class—without taking on undue risk.

1REIT dividends typically aren’t treated as qualified dividends and will generally be taxed at higher ordinary income tax rates.

2The National Bureau of Economic Research.

3Standard & Poor’s. U.S. REITs are represented by the S&P U.S. REIT Index and U.S. stocks are represented by the S&P 500 Index.

4Ronald Q. Doeswijk, Trevin Lam and Laurens Swinkels, “Historical Returns of the Market Portfolio,”, 01/2019.

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Important Disclosures:

Risks of the REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.

Please read the Schwab Intelligent Portfolios® disclosure brochures for important information, pricing, and disclosures relating to Schwab Intelligent Portfolios.

Schwab Intelligent Portfolios is made available through Charles Schwab & Co., Inc. (“Schwab”) a dually-registered investment adviser and broker dealer.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

The Alerian MLP Index is a composite of the most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for this emerging asset class.

The Bloomberg Barclays U.S. High Yield Very Liquid Index is a component of the U.S. Corporate High Yield Index that is designed to track a more liquid component of the USD-denominated, high yield, fixed-rate corporate bond market.

The S&P U.S. REIT Index defines and measures the investable universe of publicly traded real estate investment trusts domiciled in the United States.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities

The MSCI EAFE Index® is a free float-adjusted market-capitalization index that is designed to measure the equity market performance of developed markets in Europe, Australasia, and the Far East.

The Bloomberg Barclays U.S. 7–10 Year Treasury Bond Index is a component of the U.S. Treasury Index that is designed to measure U.S. dollar-denominated, fixed-rate, nominal debt with maturities of seven to 10 years issued by the U.S. Treasury.

The S&P 500® Index is designed to measure the performance of 500 leading publicly traded companies from a broad range of industries.

Bloomberg Barclays Global Aggregate ex-USD Total Return Index is a measure of global investment grade debt from 24 local currency markets.


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