Consequently, investors are likely underweight the real estate sector and could miss out on the benefits of diversifying into the asset.
Additionally, REITs provide diversification benefits as the asset shows a lower correlation to stocks and bonds. Over the past three decades, REITs’ rolling 36-month correlation to other stocks ranged from 0.89 to negative 0.16 – a value of 1 translates to perfect lock step while a negative value means the two assets moved in opposite directions. The correlation between REITs and Treasuries was 0.74 to negative 0.66 over the same period.
Nevertheless, some investors fear REITs will act negatively in rising interest rate environment. The high dividends in REITs are attractive in a low-rate environment but are less enticing once safer Treasuries show higher rates. [Don’t Overload REIT ETF Allocations]
Rising rates, though, does not spell the end of REITs. Gregg Fisher, chief investment officer of Gerstein Fisher, found that in the five periods since 1978 when the Fed hike drates, U.S. REITs had an average monthly return of 1.28%, compared to the 1.21% for U.S. stocks and 0.47% for U.S. bonds.
“The idea that REITs are bad when interest rates go up can be answered empirically,” Fisher said. “There’s no evidence of that.”
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.