Investing in real estate has long been hailed as a wealth-creator and income-generator. It’s also known as an avenue for buffering against inflation while accessing returns that often aren’t highly correlated to stocks and bonds. Positives to be sure, but not all investors can afford the capital outlays required to own multiple properties. Plus, many don’t want to be landlords. Enter real estate investment trusts (REITs), which in publicly traded form, represent the more liquid side of the real estate investing landscape. Those stocks are easily accessible via an array of ETFs, including the ALPS REIT Dividend Dogs ETF (RDOG) and the ALPS Active REIT ETF (REIT).
RDOG holds five of the highest-yielding REITs from nine real estate sub-groups, equally weighted in the ETF. That methodology literally pays dividends, as highlighted by a trailing 12-month yield of 6.52%. For its part, REIT is actively managed, indicating it offers investors more flexibility than plain vanilla, passive real estate funds.
Pros and Cons of REITs
One of the benefits often associated with real estate investing is that it beats inflation. During the inflationary eras of the early 1970, 1980s, and 2000s, real estate stocks outperformed the broader market. However, there are also times when assets such as RDOG and REIT can be vulnerable to deep retrenchment.
“Along with their return potential, real estate stocks come with certain risks,” noted Morningstar’s Amy Arnott. “Real estate is both highly cyclical and subject to periodic downturns, as its double-digit losses in both 2007 and 2008 made clear. Overall, real estate has generated both above-average risk and returns over longer time periods.”
Still, ETFs such as RDOG and REIT offer benefits. Those perks extend beyond income to include the potential to reduce correlations within portfolios.
“In the past, real estate has had relatively low correlations with the broader US equity market,” added Arnott. “Rolling three-year correlations have dropped below 0.10 during some periods, such as the early 2000s. Being untethered to the overall equity market can lead to better risk-adjusted returns when real estate is added to a diversified portfolio.”
Additionally, RDOG and REIT are suitable for long-term investors, not only because of the income component. It can take some time for the total return benefits of REITs to shine through in a portfolio.
“Morningstar’s Role in Portfolio framework recommends holding REITs or other real estate exposure for at least 10 years. We came up with this guideline partly by looking at the historical frequency of losses over various rolling time periods ranging from one year to 10 years,” concluded Arnott.
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VettaFi LLC (“VettaFi”) is the index provider for RDOG, for which it receives an index licensing fee. However, RDOG is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of RDOG.
