REITs used to be all the rage before the global financial crisis (GFC) in 2008.
They produce a great return similar to stocks, and over long stretches have some diversifying effect.
Then the GFC happened.
REITs are highly leveraged and in a financial crisis, they are hit very hard. The broader market in 2008 dropped 50% (which is enormous), but REITs dropped 70%.
Articles stopped being written about how REITs are a great diversifier. I mean they just simply don't appear any more.
And further to that, They were replaced with articles stating that REITs are not useful as a diversifier. The reasons given are
1. Since they are listed on the stock exchange, the movement goes up and down with the market. This is true and especially for major corrections. But over longer periods they still provide some diversifying effect.
2. They are already in the index, so you don't need to add them. Also true. I would like 10% in REITs (and 10% is now the commonly cited max amount you should have) but with 3-4% in the market, adding just 6% doesn't seem like it would make much difference so I don't bother, but that doesn't mean they are necessarily useless.
3. Larry Swedroe wrote an
article showing that the returns can be explained by factors (small, value, term) and you can be more effectively invest in those using small & value stocks along with long term debt such as LT bonds, and you can do so without the idiosyncratic risk of investing in those factors all within the single sector of REITs.
My own thoughts are that they are fine to either add or leave out, provided it is kept down to no more than about 10% of the portfolio.