Author Topic: REIT clarification  (Read 3589 times)

GorgeousSteak

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REIT clarification
« on: July 24, 2015, 02:39:17 PM »
Are REITs composed of stocks deal with real estate, or are they also composed of something not sold on typical stock exchanges?  To clarify, I checked a couple of the top 10 holdings in VGISX and they are just standard stocks on the NYSE.  Is any part of VGISX not a typical stock?

My expectation is that the answer will be yes, they are just a group of stocks that happen to be in a specific sector.  So my followup question is then, if I am an index investor (say I have 100% VTSMX to keep this simple), and I decide to add VGISX to my asset allocation, aren't I then becoming overweight in real estate.  Those stocks would already be present in VTSMX in their correct market weighted equilibrium, no?

CanuckExpat

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Re: REIT clarification
« Reply #1 on: July 24, 2015, 03:16:55 PM »
Your correct, REIT funds can be considered a type of sector specific fund that is already held in other funds.

By holding REIT funds, you are indeed becoming over weight in that sector. People make arguments about why this might be desirable. It is up to you whether you accept the arguments, and even if you do, whether it is worth the hassle compared to a single fund.

I do over weight REITs, along with tilting towards size (small) and value. My crystall ball is broken, so I can't tell you if it will be worth it in the long run.

forummm

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Re: REIT clarification
« Reply #2 on: July 24, 2015, 03:17:24 PM »
You can probably find more by googling. But REITs entities that deal in real estate somehow--either by owning and renting the facilities out or by owning mortgages, etc. Many REITs are publicly traded. So VGSIX is composed of publicly traded REITs. And yes, all the REITs in VGSIX are already in VTSMX.
« Last Edit: July 26, 2015, 06:56:20 AM by forummm »

GorgeousSteak

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Re: REIT clarification
« Reply #3 on: July 24, 2015, 04:52:51 PM »
Thanks for the link Canuck, there was some useful info there for me.  It seems the main reason people add them is that they have a varying correlation to stocks and bonds, which I can understand.  But it still seems a little dirty to me for an index investor to go overweight in REITs just for this reason (don't I want all the assets in exactly their percentage of the market?).  That link shows REITs making up anywhere from 0 to 2.5% of some of the standard big indexes.  Is there something going on here where real estate actually makes up more of the economy than its representation in the stock market?  That seems like the only way I could convince myself to add it...

daverobev

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Re: REIT clarification
« Reply #4 on: July 25, 2015, 11:47:08 AM »
Thanks for the link Canuck, there was some useful info there for me.  It seems the main reason people add them is that they have a varying correlation to stocks and bonds, which I can understand.  But it still seems a little dirty to me for an index investor to go overweight in REITs just for this reason (don't I want all the assets in exactly their percentage of the market?).  That link shows REITs making up anywhere from 0 to 2.5% of some of the standard big indexes.  Is there something going on here where real estate actually makes up more of the economy than its representation in the stock market?  That seems like the only way I could convince myself to add it...

Correlation - they don't behave like normal stocks.

They aren't valued like normal stocks - you look at FFO, funds from operations, rather than p/e. Also there are different regulations - they have to give back a percentage of their free cash flow or somesuch (look into that one, country dependent).

Remember "the goal" isn't to perfectly track "the" market. It's to make money. The easiest way is to track the whole market, sure - but if adding some REITs to smooth out the bumps/give income/whatever fits with your preferred asset alloc, and you will rebalance to it, it's fine.

A whole market (which market? One fund doing the world would be great... but do you want more emerging? Bonds?) fund is what is said because it's likely to produce the greatest return, going from history. Real estate tends to match inflation over time.

So.. no compelling generic reason to buy REITs, but likely no harm in having 5% VNQ.

a1smith

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Re: REIT clarification
« Reply #5 on: July 25, 2015, 11:53:34 PM »
I think you mean VGSIX - Vanguard REIT Index Fund Investor Shares.  VGSLX are the Admiral Shares and VNQ is the ETF.

VGISX is also a real estate fund but it isn't Vanguard and it is a global fund - Virtus Global Real Estate Securities Fund Class I (VGISX).

VTSMX has 3.66% real estate http://portfolios.morningstar.com/fund/summary?t=VTSMX&region=usa&culture=en-US but I can't find anything showing that VTSMX owns every REIT in VGSIX.

Many people recommend REIT's, see http://www.bogleheads.org/wiki/Lazy_portfolios.

I have about 12% REIT's in my portfolio.  I adjust how much VNQ I buy since VTSMX/VTSAX/VTI already has 3.66% REIT exposure.

NorCal

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Re: REIT clarification
« Reply #6 on: July 27, 2015, 08:20:00 AM »
A REIT is a type of corporate structure that is different than a standard C Corp.  MLP's are another common alternative to the C Corp.  Both of these types of entities receive favorable tax treatment over C Corps, but are required to distribute most of their earnings to holders.  They can be public or private.

While you will find some public REIT's in your normal index funds, their allocation is usually so small as to not make much difference.