During the 2004–2006 period of Fed rate increases, for example, REITs posted cumulative total returns of 77.9 percent, compared with 32.5 percent for stocks and 8.6 percent for bonds.
REITs own a broad array of property-ownership ventures, including apartments, hospitals, warehouses and commercial property such as hotels, shopping malls and office buildings. The game for direct investors is to assess shifting demand variables for these specific markets. These shifts are of less concern to long-term investors seeking exposure through actively managed mutual funds and passively managed index and exchange-traded funds. (Some REIT ETFS are actively managed.)
This is a small market, totaling only about $900 billion — not much greater than the market cap of Apple — and consists of only about 220 distinct property-owning entities.
Most REITs' income is from lease payments on property they own, so they generally have good cash flows to fuel earnings and dividends. Long-term, annual dividend yields have hovered around 4 percent.
More from Portfolio Perspective:
Three things investors should know when buying ETFs
Why asset allocation is so important for investors
Buying stock? Ask yourself this question first
Historically, REIT performance on average has not been correlated with that of the stock (or bond) market. But during some periods, it has. Between 1988 and 2015, REITs and the stock market both returned about 12 percent annually.
As a result of the dot-com boom, stocks outperformed REITs in the late 1990s, returning between 12 percent and 18 percent annually, compared with REITs' 9 percent to 15 percent. But since 2001, REITs have beaten stocks by 3 percent to 5 percent annually.
Though REITs have exhibited fairly low volatility in recent years, they occasionally go through distinctly choppy periods. The Dow Jones Wilshire REIT Index lost more than half its value in 2007–2008.
A key factor driving REIT performance in recent years has been the demand for residential, industrial and office space. Pent up since the financial crisis of 2008, this demand has been driving strong construction in all of these categories since 2015 and currently shows few, if any, signs of abating.