The REIT Advantage: High Returns, Low Correlation

Michael Orzano - Author

Sep. 21 2016, Updated 8:04 a.m. ET


REIT and property stock performance has been relatively strong over the long term, especially when compared with traditional bond and equity indices. Since 1992, the Dow Jones Global Ex-U.S. Select RESI has had an average total return close to 9%, while the Dow Jones U.S. Select REIT Index has had an average annualized return of approximately 11%.

The standard deviation of REIT performance has historically been relatively similar to that of common stocks. However, during the most recent financial crisis, REIT shares suffered a larger and more pronounced drawdown, as real estate was at the epicenter of the crisis.


Correlations measure the co-movement of one asset class relative to another and can allow investors to structure broadly diversified portfolios with attractive risk/return profiles.

The correlation between the Dow Jones Global Ex-U.S. Select RESI and the S&P 500 from December 1992 to June 2016 was approximately 0.66. The Dow Jones U.S. Select REIT Index displayed a slightly lower correlation with the S&P 500 over this period, at approximately 0.54.

It’s important to note that short-term correlations can deviate from long-term averages during periods of stress such as the most recent financial crisis. During the financial crisis, short-term correlations between REITs and stocks rose above 0.8.

Market Realist’s View

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REITs (IYR) have a well-established track record of a steadily growing stream of dividends along with robust long-term capital appreciation. This history has helped the sector outperform the S&P 500 (SPY)(IVV) over the past four decades. Looking at the historical compound annual total returns of various US benchmarks up to 2014, we see that REITs (RWR) have yielded 16.6%, 12.3%, and 10.6%, over 5 years, 15 years, and 25 years, respectively. On the other hand, the S&P 500 gave historical compound annual total returns of 15.5%, 4.2%, and 9.6%. US bonds yielded 4.5%, 5.7%, and 6.49% over the time period. [1. Source: NAREIT]

REITs have outstripped the performance of both equities and bonds over the long term while also beating long-term inflation rates. The graph above shows how the S&P US REIT index (FRI) has outperformed the S&P 500 over the past three years.

Not only do REITs tend to provide steady and stable returns over the long term, but they also help in diversifying investor portfolios effectively. REITs tend to have a low-to-moderate correlation with other asset classes, as you can see in the graph above. This low correlation helps improve a portfolio’s risk-adjusted returns.


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