Market Beat: Investing in the real estate sector
One of the most important concepts in investing is diversification. In other words, don’t put all your eggs into one basket.
Real estate is something that should be a component of everyone’s investment portfolio. If you use broad based index funds as part of your investment plan, like the S&P 500 index, you’ll have exposure to real estate. There is a real estate sector in the S&P 500 and it is relatively new as a separate sector. Prior to becoming its own sector, real estate was a part of the financials sector in the S&P Indices.
The real estate sector is comprised of nine different industries. Most real estate investments are in the form of real estate investment trusts. The industries in the real estate sector are; diversified, health care, hotel and motel, industrial, office, residential, retail, general and real estate services.
The retail industry within the real estate sector has been going through an interesting transition in recent years as shoppers are buying less from the brick and mortar stores and spending more over the internet for home delivery. This is a trend that will likely continue into the future. The office industry is another that has seen similar results as modern technology allows more and more people to be able to work from a home office effectively.
Investors can invest in the entire real estate sector by using an exchange traded fund that is diversified across all nine of the industries or focus on specific companies within the industries that they prefer. The exchange traded fund that represents the sector has a dividend yield of 3.68 percent and has averaged a total return of just over 7 percent for the last five years.
Another effective way to achieve diversification is through international exposure. There are several exchange traded funds available that will provide exposure to international real estate as well. One of the major international real estate investment trusts for developed countries has a current dividend yield of 4.94 percent and has averaged a return of almost 5 percent over the last five years.
Endowment investment models as used by major university endowments like Harvard typically have a greater exposure to real estate and other alternative asset classes than more common stock and bond investment models. Investors need to do their own analysis to determine what type of asset allocation is best for their unique, individual situation.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.