Why are REITS a separate asset class but healthcare is not?

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dalbright
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Why are REITS a separate asset class but healthcare is not?

Post by dalbright » Fri Nov 30, 2018 7:34 am

I know that some (not a 3-fund) view REITs as a separate investable asset class. Is there a reason why something such as healthcare is not considered a separately investable asset class for diversification purposes? In backtesting VGHCX and VGSIX (1997-present) they had a respective .73 and .57 us market correlation. Is there a specific threshold for which something is considered separate and non-correlated enough that it offers benefit? Or rather what makes REITs so special? I've read quite a few books that have split them alone out in addition to total us, intl, bonds, etc and am curious. Thanks!

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Re: Why are REITS a separate asset class but healthcare is not?

Post by IowaFarmBoy » Fri Nov 30, 2018 8:00 am

I suspect if you ask 9 bogleheads this question you will get ten different opinions. I don't think there are hard and fast rules as to what exactly an asset class is. Your original post ties the concept of a different asset class to a low correlation. I would tend to thing of these as different sectors in the market that I may or may not choose to overweight. I think the perception is that REITs are something different.

With REITs, my perception is that I own real estate. When I think health care funds, I feel like I am just buying stock in another company that brings together resources and tries to manage them for a profit- just like any company does- whether they are manufacturing autos, cell phones, running a bank or in health care. That is why I would lean toward them being a separate class.

The reality, of course, could be very different. Not all REITs actually own real estate. Some just invest in mortgages on real estate. And a REIT is just another company bringing resources together to make a profit. However, their resources are skewed very heavily to real estate.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by dalbright » Fri Nov 30, 2018 8:08 am

Ha! I know the whole past performance does not...issue with any class but it seems like healthcare has done quite well over the 20 year referenced span that I was able to search. Granted the whole class change change with a stroke of a pen etc but that's the same for any industry or market. The first book i read it was so easy...pick these 3-7 things...but the more i've learned the more questions I end up having on why we choose what we choose.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by Call_Me_Op » Fri Nov 30, 2018 8:10 am

I don't think of REITs as a separate asset class. REITs are stocks of companies that own and manage real estate and related investments. They are already represented in the market index in proportion to their capitalization. And they act like stocks - since that's what they are.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by Doc » Fri Nov 30, 2018 8:10 am

The tax, deprecation and financing of real estate are significantly different than most of the other businesses.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by staycalm » Fri Nov 30, 2018 8:19 am

A separate asset class compared to what? For example if you hold TSM (VTSAX) in your portfolio, then Healthcare would not be a separate asset class because 13.6% of TSM is the Healthcare sector. REITS would be a separate asset class because Real Estate is not a sector within TSM. So when deciding what asset classes you want exposure to, you need to look into the funds you are considering to see what sectors they represent.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by JoMoney » Fri Nov 30, 2018 8:21 am

REITs are legally structured differently than other types of corporations, and have different tax considerations.

Income from rents is kinda-sorta different than other types of business income, it doesn't have the guaranty of a bond, but is usually set at a fixed rate contractual lease that has a higher priority if the renter wants to stay on the property.

REITs don't have the same ability to scale like other businesses, so aren't usually considered a "growth" business. They are very capital-intensive with big costs sunk into the property and buildings and return on equity is pretty low unless a lot of leverage is used... so they're very interest rate sensitive.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by dalbright » Fri Nov 30, 2018 8:28 am

staycalm wrote:
Fri Nov 30, 2018 8:19 am
A separate asset class compared to what? For example if you hold TSM (VTSAX) in your portfolio, then Healthcare would not be a separate asset class because 13.6% of TSM is the Healthcare sector. REITS would be a separate asset class because Real Estate is not a sector within TSM. So when deciding what asset classes you want exposure to, you need to look into the funds you are considering to see what sectors they represent.
Just a quick morningstar glance of VTI shows 3.65 weight to real estate and 14.4 to Healthcare thus REITs are included in TSM variations but to a lesser percent. My main point of the topic was less so holding the market share if you will, but why are REITs considered "different" as something like healthcare has in the past 20 years performed significantly better and would appear to have offered a better diversification. Many portfolio tweaks to a 3-fund add in REITs and I am unclear if this is just a historical choice or like others have expressed the tax treatments, owning a tangible piece of land, etc. Thanks all for your continued discussion!

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Re: Why are REITS a separate asset class but healthcare is not?

Post by stan1 » Fri Nov 30, 2018 8:34 am

One argument for overweighting REITs has been that a lot of real estate is privately owned so overweighting brings you closer to true market weight. Real estate by itself is an asset that can be bought and sold. Health care is not an asset.

The decision to hold REITs at market weight or overweight is highly unlikely to make a meaningful contribution to the overall success or failure of your long term investment and retirement plans.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by retiredjg » Fri Nov 30, 2018 8:36 am

Health care is not an asset class. It is a sector of the market. As long as you own the whole market, you own all the sectors.

Here are the "equity sectors" which Vanguard lists for it's total stock index fund.
  • Basic Materials
    Consumer Goods
    Consumer Services
    Financials
    Health Care
    Industrials
    Oil & Gas
    Technology
    Telecommunications
    Utilities

You'll notice that REITs or even real estate of any kind are not listed as a sector. I don't know why. Maybe REIT stocks fall into one of the categories. Maybe REIT stocks fall into several of the categories. Maybe they are something else entirely.

There does not seem to be a hard definition for "asset class" although there is a general agreement that stocks and bonds and maybe cash are separate asset classes. And within stocks there are the asset classes (perhaps sub-classes) of US and foreign and even further sub classes of large cap, mid cap, and small cap and even further sub-classes of value, blend, and growth. Individual REIT stocks can fall into almost all of those sub-classes (or asset classes depending on how you see it).

Whether REIT stocks should be considered a separate asset class from other stocks, I don't know. The argument is that REIT stocks act differently enough from other stocks that maybe REIT should be considered on its own. It is true that the stock market and the real estate market are not always synced. It is true that REIT stocks are taxed differently from other stocks.

Is this enough to make REIT stocks a completely different asset class? Even if the answer is yes or no, what difference does it make?

I think that many people would say that REIT stocks might act as a diversifier even if they are not willing to call REITs a separate asset class.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by JoMoney » Fri Nov 30, 2018 8:41 am

retiredjg wrote:
Fri Nov 30, 2018 8:36 am
... You'll notice that REITs or even real estate of any kind are not listed as a sector. I don't know why. Maybe REIT stocks fall into one of the categories. Maybe REIT stocks fall into several of the categories. Maybe they are something else entirely...
Real estate doesn't show up as a "sector" under the "Industry Classification Benchmark system" which is what Vanguard uses looking at the 'Total Market Index Fund'.
If you look at the S&P index funds, S&P uses the "Global Industry Classification Standard system", which recently added real estate as a distinct sector (it used to be lumped in with financials).

There does not seem to be a hard definition for "asset class"
... asset class is a group of securities that exhibits similar characteristics, behaves similarly in the marketplace and is subject to the same laws and regulations...
https://www.investopedia.com/terms/a/assetclasses.asp
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Re: Why are REITS a separate asset class but healthcare is not?

Post by retiredjg » Fri Nov 30, 2018 8:49 am

JoMoney wrote:
Fri Nov 30, 2018 8:41 am
retiredjg wrote:
Fri Nov 30, 2018 8:36 am
... You'll notice that REITs or even real estate of any kind are not listed as a sector. I don't know why. Maybe REIT stocks fall into one of the categories. Maybe REIT stocks fall into several of the categories. Maybe they are something else entirely...
Real estate doesn't show up as a "sector" under the "Industry Classification Benchmark system" which is what Vanguard uses looking at the 'Total Market Index Fund'.
If you look at the S&P index funds, S&P uses the "Global Industry Classification Standard system", which recently added real estate as a distinct sector (it used to be lumped in with financials).
I guess Morningstar must use this second system because as mentioned by dalbright, they do list real estate as a sector (not that real estate and REIT are the same thing).

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Re: Why are REITS a separate asset class but healthcare is not?

Post by vineviz » Fri Nov 30, 2018 8:57 am

dalbright wrote:
Fri Nov 30, 2018 7:34 am
I know that some (not a 3-fund) view REITs as a separate investable asset class. Is there a reason why something such as healthcare is not considered a separately investable asset class for diversification purposes? In backtesting VGHCX and VGSIX (1997-present) they had a respective .73 and .57 us market correlation. Is there a specific threshold for which something is considered separate and non-correlated enough that it offers benefit? Or rather what makes REITs so special? I've read quite a few books that have split them alone out in addition to total us, intl, bonds, etc and am curious. Thanks!
The treatment of REITs as a separate asset class is primarily a holdout from the days when asset allocation wasn't nearly as sophisticated or as quantitatively robust as it is today.

As others have pointed out, they are just another sector of the equity market (like utility stocks or healthcare stocks). Each equity sector, however, does have slightly different characteristics.

REIT returns are a function of both the market factor (i.e. beta) and the term premium (i.e. the bond premium). As a result, they are a kind of chameleon. If you replace some of your stock allocation with REITs, your portfolio volatility (generally) goes down. If you replace some of your bond allocation with REITs, your portfolio return has (sometimes) gone up. But there's no significant independent source of risk there: overweighting REIT doesn't improve diversification much, and you can achieve the same effect on expected returns and expected volatility by just adjusting your overall stock/bond allocation.

If you wanted to improve portfolio diversification, you're correct to observe that there are other sectors that are much more powerful (utilities and healthcare in particular) diversifiers.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by Peculiar_Investor » Fri Nov 30, 2018 9:02 am

JoMoney wrote:
Fri Nov 30, 2018 8:41 am
retiredjg wrote:
Fri Nov 30, 2018 8:36 am
... You'll notice that REITs or even real estate of any kind are not listed as a sector. I don't know why. Maybe REIT stocks fall into one of the categories. Maybe REIT stocks fall into several of the categories. Maybe they are something else entirely...
Real estate doesn't show up as a "sector" under the "Industry Classification Benchmark system" which is what Vanguard uses looking at the 'Total Market Index Fund'.
If you look at the S&P index funds, S&P uses the "Global Industry Classification Standard system", which recently added real estate as a distinct sector (it used to be lumped in with financials).
The definitions of GICS Sectors can be found in Global Industry Classification Standard (GICS®)

The Real Estate sector was announced in late 2014, see GICS Press Release 10 Nov 2014. The changes are being considered for implementation after the market close (ET) on August 31, 2016.
retiredjg wrote:
Fri Nov 30, 2018 8:36 am
There does not seem to be a hard definition for "asset class" although there is a general agreement that stocks and bonds and maybe cash are separate asset classes.
The Bogleheads wiki has a glossary entry, Asset class - Bogleheads that provides a viewpoint.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by Valuethinker » Fri Nov 30, 2018 9:02 am

vineviz wrote:
Fri Nov 30, 2018 8:57 am
dalbright wrote:
Fri Nov 30, 2018 7:34 am
I know that some (not a 3-fund) view REITs as a separate investable asset class. Is there a reason why something such as healthcare is not considered a separately investable asset class for diversification purposes? In backtesting VGHCX and VGSIX (1997-present) they had a respective .73 and .57 us market correlation. Is there a specific threshold for which something is considered separate and non-correlated enough that it offers benefit? Or rather what makes REITs so special? I've read quite a few books that have split them alone out in addition to total us, intl, bonds, etc and am curious. Thanks!
The treatment of REITs as a separate asset class is primarily a holdout from the days when asset allocation wasn't nearly as sophisticated or as quantitatively robust as it is today.

As others have pointed out, they are just another sector of the equity market (like utility stocks or healthcare stocks). Each equity sector, however, does have slightly different characteristics.
I think the pass-thru nature of the entity from a tax perspective makes them structurally different from other listed sectors (except MLPs, perhaps)?

It's been argued that from an agency costs point of view, the agency costs of REITs are lower because management has to dividend out 90% of profits - there's no Free Cash Flow Theory of the Firm problem (in the Michael Jensen sense).

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Re: Why are REITS a separate asset class but healthcare is not?

Post by Valuethinker » Fri Nov 30, 2018 9:03 am

JoMoney wrote:
Fri Nov 30, 2018 8:21 am
REITs are legally structured differently than other types of corporations, and have different tax considerations.

Income from rents is kinda-sorta different than other types of business income, it doesn't have the guaranty of a bond, but is usually set at a fixed rate contractual lease that has a higher priority if the renter wants to stay on the property.

REITs don't have the same ability to scale like other businesses, so aren't usually considered a "growth" business. They are very capital-intensive with big costs sunk into the property and buildings and return on equity is pretty low unless a lot of leverage is used... so they're very interest rate sensitive.
This is certainly pretty much the standard, textbook view.

REITs are not ordinary listed companies. They are closer to an MLP.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by neoptolemus412 » Fri Nov 30, 2018 9:14 am

Most sectors are simply slicing up equities by common companies. Financial services, Healthcare, Tech. Someone just compiles a list of similar companies in similar industries and 'boom', you have the healthcare sector index, etf, etc. The sector is primarily based upon the equity price of a portfolio of companies. If the companies do well, the sector does well. There are rarely any special tax treatment for sector stock or bond funds. They are treated the same across sectors.

For REITs, the investments are traditionally cashflows or returns from real estate. Industrial, Multi-family, hotel, commercial, etc. REITs obtain their cash flows from the value of properties, rents, purchases/sales, etc. Usually REITs use a funds from operations metric to derive their value. In addition, REITs have special tax treatment in the US. At the trust level, REITs are tax exempt provided they pay at least 90% of their profits to shareholders, while investors must pay ordinary income tax on their dividends and on shares bought and sold. In short, REITs are a hybrid vehicle to give a wide, diverse group of investors access to real estate with special tax treatment to denote the cash flows from the REIT are essentially real estate driven income and not appreciation of a company.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by nisiprius » Fri Nov 30, 2018 9:16 am

Because it's a matter of opinion and opinions vary.

MSCI and S&P Dow Jones seem perfectly happy classifying REITs as just another stock sector, part of the S&P 500. Before 2016 it wasn't even considered a sector of its own, just a subsector within "financials" sector.

The fact that they're required to pay out 90% of their taxable income as dividends is a fundamental structural feature that does make them a little different from other stocks; I don't think you can point to anything like that in healthcare or any other sector.

There's a pretty good case to be made that direct land ownership is a fundamentally different source of investment return from business operations, just as there's a case for direct ownership of gold being fundamentally different from business operations, but that seems irrelevant to me. REITS are businesses linked to real estate, just as gold mining companies are businesses linked to precious metals; that may give them a different flavor, but they are still fundamentally businesses.

(Of course, the "asset class" stuff puzzles me anyway. Certainly, stocks and bonds are different asset classes. But groups of stocks, chosen by some filtering rule, are different "classes?" I don't see it.)

Having been overly worshipful of Burton Malkiel, I actually had 3% of my portfolio in the Vanguard REIT Index Fund during 2008-2009. It sure didn't feel like a separate asset class then!
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Re: Why are REITS a separate asset class but healthcare is not?

Post by nisiprius » Fri Nov 30, 2018 9:26 am

I guess the real question is, "why do you care?" Do you think "separate asset class" means "good" and "not separate asset class" means "bad?" I just shrug and do total market, but if you have high conviction that you want to overweight healthcare, I don't see why you should care whether anyone considers it a separate asset class or not.

For what it's worth, simply asking PortfolioVisualizer for the correlations between the Vanguard Total Stock Market Index Fund (VTSMX), the Vanguard REIT Index Fund (VGSIX), and the Vanguard Healthcare [not index] Fund (VGHCX), and accepting all defaults, I see an 0.82 correlation between healthcare and total stock, and only 0.67 between REITs and total stock, so that does tend to buttress the idea of REITs as "more different" from the rest of the market than healthcare.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by Valuethinker » Fri Nov 30, 2018 9:43 am

nisiprius wrote:
Fri Nov 30, 2018 9:16 am
Because it's a matter of opinion and opinions vary.

MSCI and S&P Dow Jones seem perfectly happy classifying REITs as just another stock sector, part of the S&P 500. Before 2016 it wasn't even considered a sector of its own, just a subsector within "financials" sector.

The fact that they're required to pay out 90% of their taxable income as dividends is a fundamental structural feature that does make them a little different from other stocks; I don't think you can point to anything like that in healthcare or any other sector.

There's a pretty good case to be made that direct land ownership is a fundamentally different source of investment return from business operations, just as there's a case for direct ownership of gold being fundamentally different from business operations, but that seems irrelevant to me. REITS are businesses linked to real estate, just as gold mining companies are businesses linked to precious metals; that may give them a different flavor, but they are still fundamentally businesses.

(Of course, the "asset class" stuff puzzles me anyway. Certainly, stocks and bonds are different asset classes. But groups of stocks, chosen by some filtering rule, are different "classes?" I don't see it.)

Having been overly worshipful of Burton Malkiel, I actually had 3% of my portfolio in the Vanguard REIT Index Fund during 2008-2009. It sure didn't feel like a separate asset class then!
The point about flow thru is no double taxation.

Ordinary companies pay tax. Then their shareholders pay tax on their dividends paid.

That's not true with REITs - its straight pass thru of profits into the hands of investors.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by vineviz » Fri Nov 30, 2018 11:36 am

Valuethinker wrote:
Fri Nov 30, 2018 9:02 am
vineviz wrote:
Fri Nov 30, 2018 8:57 am
As others have pointed out, they are just another sector of the equity market (like utility stocks or healthcare stocks). Each equity sector, however, does have slightly different characteristics.
I think the pass-thru nature of the entity from a tax perspective makes them structurally different from other listed sectors (except MLPs, perhaps)?
You're no doubt correct on this point, but I think you could probably make a plausible case that ANY sector has enough different legal and regulatory nuances to make them "structurally different" from other sectors. The problem is turning this subjective evaluation into some sort of objective criteria: just HOW structurally different does a sector need to be in order to stop being a sector and start being an asset class?

There are any number of different quantitative ways to evaluate whether REITs represent a special source of risk or return in the context of an investment portfolio, and none of them really support the argument that they are special.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by JoMoney » Fri Nov 30, 2018 11:46 am

A long time back, REITs were excluded from many of the broad market indices (at least the S&P 500, but I think others too). Because of the differences in the tax impact of the dividends on an individual's portfolio, it does make some sense to break them out separate ... but for whatever reason (I'm not clear on why) when the REITs in a small amount are lumped in with a broad market equity fund it doesn't negate it from being 100% qualified dividends :confused So in some sense, it's actually advantageous for investors now that they're in the broad market indices.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by vineviz » Fri Nov 30, 2018 11:47 am

nisiprius wrote:
Fri Nov 30, 2018 9:26 am
For what it's worth, simply asking PortfolioVisualizer for the correlations between the Vanguard Total Stock Market Index Fund (VTSMX), the Vanguard REIT Index Fund (VGSIX), and the Vanguard Healthcare [not index] Fund (VGHCX), and accepting all defaults, I see an 0.82 correlation between healthcare and total stock, and only 0.67 between REITs and total stock, so that does tend to buttress the idea of REITs as "more different" from the rest of the market than healthcare.
Like utility stocks and consumer staples, though, REITs also have a reasonably high correlation with U.S. bonds. I think a fair comparison would be to examine the correlation of REITS with an already diversified stock/bond portfolio. Let's use VBINX as a proxy for that:

https://www.portfoliovisualizer.com/ass ... ingDays=60
  • Vanguard Industrials ETF (correl = 0.94)
  • Vanguard Consumer Discretionary ETF (correl = 0.92)
  • Vanguard Materials ETF (correl = 0.9)
  • Vanguard Information Technology ETF (correl = 0.89)
  • Vanguard Financials ETF (correl = 0.86)
  • Vanguard Health Care ETF (correl = 0.82)
  • Vanguard Consumer Staples ETF (correl = 0.78)
  • Vanguard Real Estate ETF (correl = 0.77)
  • Vanguard Communication Services ETF (correl = 0.75)
  • Vanguard Energy ETF (correl = 0.71)
  • Vanguard Utilities ETF (correl = 0.54)
REITs aren't exactly middle of the pack, but there are other sectors (e.g. utilities and energy) that are "more different" than REITs are.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by Valuethinker » Fri Nov 30, 2018 12:18 pm

vineviz wrote:
Fri Nov 30, 2018 11:36 am
Valuethinker wrote:
Fri Nov 30, 2018 9:02 am
vineviz wrote:
Fri Nov 30, 2018 8:57 am
As others have pointed out, they are just another sector of the equity market (like utility stocks or healthcare stocks). Each equity sector, however, does have slightly different characteristics.
I think the pass-thru nature of the entity from a tax perspective makes them structurally different from other listed sectors (except MLPs, perhaps)?
You're no doubt correct on this point, but I think you could probably make a plausible case that ANY sector has enough different legal and regulatory nuances to make them "structurally different" from other sectors. The problem is turning this subjective evaluation into some sort of objective criteria: just HOW structurally different does a sector need to be in order to stop being a sector and start being an asset class?
The dividend flow thru thing is AFAIK quite unique. Pace Jensen, it's held to reduce agency costs (management cannot hold on to spare cash flow).

There are any number of different quantitative ways to evaluate whether REITs represent a special source of risk or return in the context of an investment portfolio, and none of them really support the argument that they are special.
https://www.marketwatch.com/story/why-r ... 2017-10-18

I am guessing you are referring to the Jared Kizer research that Larry Swedroe references?

Vanguard certainly seems to think they *are*

https://personal.vanguard.com/pdf/icreecr.pdf

Certainly earlier work seemed to substantiate that

https://www.cfapubs.org/doi/abs/10.2469/faj.v53.n2.2072

For structural reasons as above I think once can make a case REITs are a separate asset class (or a proxy for real estate which is a separate asset class) which one couldn't make for, say, healthcare.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by Atgard » Fri Nov 30, 2018 12:20 pm

I consider 4 main separate "asset classes":
- Stocks (with flavors of large/small, domestic/int'l, various sectors, etc.)
- Fixed Income (bonds, CDs, cash earning interest, etc.)
- Real Estate (my house, investment properties, REITS)
- Commodities (the easiest to invest in is gold or silver, but copper, salt, oil, pork bellies, etc.)

I think each of these broad categories has different risk & expected return, different time horizons, and are (to a meaningful extent, but not perfectly) un-correlated with each other.

Investing in these different asset classes provides diversification benefits to the extent they are uncorrelated, and each protects against different bad events (market crashes, hyperinflation, etc.). I think they each have some place in a portfolio, how much of course up to the investor's risk tolerance, time horizon, etc.

I do consider REITs (which are primarily collecting rent from owned real property, and have different structure & taxation) different enough from general stocks (businesses making profit in many ways, selling stuff, providing services, etc.) to count them in a separate asset class. There are many scenarios where real estate prices and rents zig when equity markets zag (like 2001), and others when they have both moved together (like 2008). So not a perfect hedge by any means, but also not the same thing either.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by petulant » Fri Nov 30, 2018 12:47 pm

Many have asked the question, are there enough differences to make it unique? I'm not sure there are enough. Even if there are some differences, though, the next question is whether they are enough to make a difference. So here's a question--with a .77 correlation to U.S. equities, do you really think a .05 or .10 or .15 allocation will make a difference? It won't. You're gonna need a .25 or more allocation for it to matter. And at that point, you are very much overweight--you're making a direct bet that REITs will outperform, not a bet that they will provide diversification or some other "asset class" type return.

To illustrate the point, I ran two portfoliovisualizer simulations--one from 1994 (https://www.portfoliovisualizer.com/bac ... 0&REIT2=15) and another from 2004 ((https://www.portfoliovisualizer.com/bac ... 0&REIT2=15)). In each, I compared 50/25/25 U.S. stock, international, and total bond market against 45/20/20/15 U.S. stock, international bond, total bond, and REIT. Since 2004, the REIT-inclusive portfolio had about 40bps greater return at the cost of about 1.2 more stdev. As a result, the portfolio without REITs had a higher sharpe ratio. Since 1994, however, the REIT portfolio handily outperformed. I attribute that to early outperformance before the REIT sector became normalized and included in most indexes and overweight strategies. I am doubtful the 1994-2004 outperformance will continue.

Hence, even if there are some arguments for REITs being unique, I am skeptical you will materially profit going forward, especially from any treatment as a unique asset class.

EDIT: snip
Last edited by petulant on Sat May 25, 2019 8:44 pm, edited 1 time in total.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by megabad » Fri Nov 30, 2018 2:05 pm

retiredjg wrote:
Fri Nov 30, 2018 8:36 am
Health care is not an asset class. It is a sector of the market. As long as you own the whole market, you own all the sectors.
+1. This seems like a linguistics question (sectors vs asset classes) and I agree with this view. REITs typically fall into Financials or Retail/Goods/Services sector depending on index I think, but some also consider them a separate class (for reasons indicated in above posts). Agree that it doesn't really matter what word you use to describe an investment, you just need to decide how it fits into your plan (market weight, tilt toward, away etc).

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Re: Why are REITS a separate asset class but healthcare is not?

Post by ThrustVectoring » Fri Nov 30, 2018 2:47 pm

US real estate is very roughly worth $30 trillion, with $15 trillion in mortgages. The US stock market is also worth very roughly $30 trillion. Most real estate is privately held and thus not included in the total US stock market - it's roughly 2% REITs. There's an argument to be made that the total stock market under-weights real estate for this reason, and that if your assets don't include directly held real estate then you should over-weight REITs to make up for it.

In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
Current portfolio: 60% VTI / 40% VXUS

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Re: Why are REITS a separate asset class but healthcare is not?

Post by JoMoney » Fri Nov 30, 2018 2:51 pm

^ There is a ton of "real estate" on the balance sheets of 'Total Stock market' companies... it's just not incorporated as a REIT, doesn't necessarily earn rental income, and is not the main business the companies are in.
Walmart has over $114 billion in 'property plant and equipment'

Behind the Scenes: How Walmart Makes Money in Real Estate
http://moneymamba.com/how-walmart-makes ... al-estate/
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Re: Why are REITS a separate asset class but healthcare is not?

Post by Call_Me_Op » Fri Nov 30, 2018 3:43 pm

By the way, Larry Swedroe has recently written an article that addresses this question:

https://www.etf.com/sections/index-inve ... nt-special
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Re: Why are REITS a separate asset class but healthcare is not?

Post by nisiprius » Fri Nov 30, 2018 6:54 pm

JoMoney wrote:
Fri Nov 30, 2018 11:46 am
...A long time back, REITs were excluded from many of the broad market indices (at least the S&P 500, but I think others too)...
Are you sure? I can't confirm this in a simple web search. Do you have a link or other reference?

At lot of people misunderstood what happened in 2016 and somehow thought that REIT stocks were being included in the S&P 500 for the first time.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by JBTX » Fri Nov 30, 2018 7:37 pm

ThrustVectoring wrote:
Fri Nov 30, 2018 2:47 pm
US real estate is very roughly worth $30 trillion, with $15 trillion in mortgages. The US stock market is also worth very roughly $30 trillion. Most real estate is privately held and thus not included in the total US stock market - it's roughly 2% REITs. There's an argument to be made that the total stock market under-weights real estate for this reason, and that if your assets don't include directly held real estate then you should over-weight REITs to make up for it.

In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
Total stock market about $30 trillion.

https://www.google.com/amp/s/www.barron ... 1516285704

Total commercial real estate approximately $6 trillion.

https://www.thebalance.com/what-is-comm ... te-3305914

Total value of residential $30 trillion.

Total REIT market cap = 1.2 trillion. REITS own about 2 trillion of assets. 1/3 of commercial property



https://www.housingwire.com/articles/38 ... -time-high


https://www.reit.com/sites/default/file ... ec2017.pdf


Based on that you could make a case for over weighting REITS. At the same time you should also figure out the impact of your home on your total net worth portfolio.
Last edited by JBTX on Fri Nov 30, 2018 8:59 pm, edited 1 time in total.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by vineviz » Fri Nov 30, 2018 7:37 pm

ThrustVectoring wrote:
Fri Nov 30, 2018 2:47 pm
In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
But are they?

I mean, do REITs actually provide exposure to the real estate market independent of the exposure already provided by equity and fixed income investments? If there is evidence that they do, I'd love to see it: so far I haven't found any.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by ge1 » Fri Nov 30, 2018 7:59 pm

Lots of good arguments in this thread and there is no „right“ answer.

From a practical standpoint, I separate my portfolio into

Cash
Bonds
Equity
Other


Other can include REITs, HIgh Yield Bonds, Energy, Precious Metals, Emerging Market Bonds, Utility Stocks. From my experience each of those is attractive in specific circumstances and I rotate between them accordingly. They behave very much like equities (most of them are equities) so I set a total allocation of Equities plus Other when I think about my risky assets.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by JBTX » Fri Nov 30, 2018 8:07 pm

ge1 wrote:
Fri Nov 30, 2018 7:59 pm
Lots of good arguments in this thread and there is no „right“ answer.

From a practical standpoint, I separate my portfolio into

Cash
Bonds
Equity
Other


Other can include REITs, HIgh Yield Bonds, Energy, Precious Metals, Emerging Market Bonds, Utility Stocks. From my experience each of those is attractive in specific circumstances and I rotate between them accordingly. They behave very much like equities (most of them are equities) so I set a total allocation of Equities plus Other when I think about my risky assets.
This is historically how I've done it. The "other" amounting to 10% at most. Mostly REITS, commodities, precious metals, natural resources etc.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by Nate79 » Fri Nov 30, 2018 8:24 pm

JBTX wrote:
Fri Nov 30, 2018 7:37 pm
ThrustVectoring wrote:
Fri Nov 30, 2018 2:47 pm
US real estate is very roughly worth $30 trillion, with $15 trillion in mortgages. The US stock market is also worth very roughly $30 trillion. Most real estate is privately held and thus not included in the total US stock market - it's roughly 2% REITs. There's an argument to be made that the total stock market under-weights real estate for this reason, and that if your assets don't include directly held real estate then you should over-weight REITs to make up for it.

In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
Total stock market about $30 trillion.

https://www.google.com/amp/s/www.barron ... 1516285704

Total commercial real estate approximately $6 trillion.

https://www.thebalance.com/what-is-comm ... te-3305914

Total value of residential $30 billion.

Total REIT market cap = 1.2 trillion. REITS own about 2 trillion of assets. 1/3 of commercial property



https://www.housingwire.com/articles/38 ... -time-high


https://www.reit.com/sites/default/file ... ec2017.pdf


Based on that you could make a case for over weighting REITS. At the same time you should also figure out the impact of your home on your total net worth portfolio.
The total value of residential real estate is 30 trillion, not billion.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by KyleAAA » Fri Nov 30, 2018 8:49 pm

I don't know if many people consider REITs a separate asset class. People consider real estate to be a separate asset class with REITs being a highly imperfect proxy.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by JBTX » Fri Nov 30, 2018 8:59 pm

Nate79 wrote:
Fri Nov 30, 2018 8:24 pm
JBTX wrote:
Fri Nov 30, 2018 7:37 pm
ThrustVectoring wrote:
Fri Nov 30, 2018 2:47 pm
US real estate is very roughly worth $30 trillion, with $15 trillion in mortgages. The US stock market is also worth very roughly $30 trillion. Most real estate is privately held and thus not included in the total US stock market - it's roughly 2% REITs. There's an argument to be made that the total stock market under-weights real estate for this reason, and that if your assets don't include directly held real estate then you should over-weight REITs to make up for it.

In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
Total stock market about $30 trillion.

https://www.google.com/amp/s/www.barron ... 1516285704

Total commercial real estate approximately $6 trillion.

https://www.thebalance.com/what-is-comm ... te-3305914

Total value of residential $30 billion.

Total REIT market cap = 1.2 trillion. REITS own about 2 trillion of assets. 1/3 of commercial property



https://www.housingwire.com/articles/38 ... -time-high


https://www.reit.com/sites/default/file ... ec2017.pdf


Based on that you could make a case for over weighting REITS. At the same time you should also figure out the impact of your home on your total net worth portfolio.
The total value of residential real estate is 30 trillion, not billion.
Fixed!

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Re: Why are REITS a separate asset class but healthcare is not?

Post by nedsaid » Fri Nov 30, 2018 9:08 pm

dalbright wrote:
Fri Nov 30, 2018 7:34 am
I know that some (not a 3-fund) view REITs as a separate investable asset class. Is there a reason why something such as healthcare is not considered a separately investable asset class for diversification purposes? In backtesting VGHCX and VGSIX (1997-present) they had a respective .73 and .57 us market correlation. Is there a specific threshold for which something is considered separate and non-correlated enough that it offers benefit? Or rather what makes REITs so special? I've read quite a few books that have split them alone out in addition to total us, intl, bonds, etc and am curious. Thanks!
In reality, REITs are stocks. So a REIT fund is really a sector fund. It has appeal as an investment because REITs and the S&P 500 had similar returns but low correlation. Whether that continues in the future is up for question. I do consider REITs to be a separate asset class and I purchased when REIT funds become available. But for various reasons, the case for them is less compelling than they used to be. One thing is that REITs got to be very expensive and the second thing is that their performance could be explained by factors and were nothing special. Many folks who once really liked REITs are neutral about them now.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by megabad » Fri Nov 30, 2018 9:09 pm

vineviz wrote:
Fri Nov 30, 2018 7:37 pm
ThrustVectoring wrote:
Fri Nov 30, 2018 2:47 pm
In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
But are they?

I mean, do REITs actually provide exposure to the real estate market independent of the exposure already provided by equity and fixed income investments? If there is evidence that they do, I'd love to see it: so far I haven't found any.
Vanguard REIT Index R2 is 0.25 and Beta is 0.62. Seems like the broad REIT market moves somewhat with the broad equity market (since R2>0) but not extremely closely and the volatility is somewhat muted. I suppose different folks would use this to either justify investing in REITs separately or not. I would say an interesting question is whether the public REIT indices are actually representative of real estate market as a whole though (this is pretty difficult to determine).

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Re: Why are REITS a separate asset class but healthcare is not?

Post by MotoTrojan » Fri Nov 30, 2018 9:10 pm

Because healthcare companies and most other public companies aren’t legally obligated to share 90% of their income with you.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by stlutz » Fri Nov 30, 2018 10:52 pm

JoMoney wrote:
Fri Nov 30, 2018 11:46 am
for whatever reason (I'm not clear on why) when the REITs in a small amount are lumped in with a broad market equity fund it doesn't negate it from being 100% qualified dividends :confused So in some sense, it's actually advantageous for investors now that they're in the broad market indices.
Funds are allowed to round up from 95% to 100%.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by stlutz » Fri Nov 30, 2018 11:00 pm

nisiprius wrote:
Fri Nov 30, 2018 6:54 pm
JoMoney wrote:
Fri Nov 30, 2018 11:46 am
...A long time back, REITs were excluded from many of the broad market indices (at least the S&P 500, but I think others too)...
Are you sure? I can't confirm this in a simple web search. Do you have a link or other reference?

At lot of people misunderstood what happened in 2016 and somehow thought that REIT stocks were being included in the S&P 500 for the first time.
It was back in 2001. Here are a couple of links:

https://www.plansponsor.com/standard-po ... to-sp-500/
https://www.globest.com/sites/globest/2 ... 500-index/
For many years, REITs were not eligible for the Standard & Poor indices because the old policy reflected REITs as passive investment vehicles. However, a more recent review revealed that the majority of REITs are now operating companies that purchase, manage, invest in and market real estate. Still, S&P indices may not include REITs that are principally passive investment companies and do not actively manage and operate real estate properties.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by kevinpet » Fri Nov 30, 2018 11:13 pm

dalbright wrote:
Fri Nov 30, 2018 8:28 am
My main point of the topic was less so holding the market share if you will, but why are REITs considered "different" as something like healthcare has in the past 20 years performed significantly better and would appear to have offered a better diversification. Many portfolio tweaks to a 3-fund add in REITs and I am unclear if this is just a historical choice or like others have expressed the tax treatments, owning a tangible piece of land, etc. Thanks all for your continued discussion!
Whether a sector / asset class has done better than another isn't a factor in whether it's a sector vs. asset class. Real estate itself is definitely a separate asset class from equities. REITS are the liquid easily tradable instrument that best captures that asset class. REITs are technically equities and are included in some indexes, and purists who focus on that would say that REITS are not an asset class. The debate is mostly around whether REITS are more like equities or more like real estate itself. Correlation or diversification value would only be a factor insofar as it informs this debate. If stocks and bonds became very correlated, it wouldn't change that they are separate asset classes.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by ge1 » Sat Dec 01, 2018 11:55 am

JBTX wrote:
Fri Nov 30, 2018 8:07 pm
ge1 wrote:
Fri Nov 30, 2018 7:59 pm
Lots of good arguments in this thread and there is no „right“ answer.

From a practical standpoint, I separate my portfolio into

Cash
Bonds
Equity
Other


Other can include REITs, HIgh Yield Bonds, Energy, Precious Metals, Emerging Market Bonds, Utility Stocks. From my experience each of those is attractive in specific circumstances and I rotate between them accordingly. They behave very much like equities (most of them are equities) so I set a total allocation of Equities plus Other when I think about my risky assets.
This is historically how I've done it. The "other" amounting to 10% at most. Mostly REITS, commodities, precious metals, natural resources etc.
Yes, same here, 10% max for other.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by vineviz » Sat Dec 01, 2018 12:27 pm

megabad wrote:
Fri Nov 30, 2018 9:09 pm
vineviz wrote:
Fri Nov 30, 2018 7:37 pm
ThrustVectoring wrote:
Fri Nov 30, 2018 2:47 pm
In short, REITs aren't a separate assets class, real estate is, and REITs are a liquid way to get exposure to it.
But are they?

I mean, do REITs actually provide exposure to the real estate market independent of the exposure already provided by equity and fixed income investments? If there is evidence that they do, I'd love to see it: so far I haven't found any.
Vanguard REIT Index R2 is 0.25 and Beta is 0.62. Seems like the broad REIT market moves somewhat with the broad equity market (since R2>0) but not extremely closely and the volatility is somewhat muted.
The R-squared is actually much higher when accounting for factors besides the market factor (e.g. size, term, etc.), and the correlation of REITs with a typical 60/40 stock/bond portfolio is pretty high. Higher than for several other equity sector funds, for instance.

megabad wrote:
Fri Nov 30, 2018 9:09 pm
I would say an interesting question is whether the public REIT indices are actually representative of real estate market as a whole though (this is pretty difficult to determine).
I think this is the question that should be confronted. Many people seem to assume that REITs are a proxy for direct real estate investment, but the evidence I've seen says they aren't (or at least not a very good one).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why are REITS a separate asset class but healthcare is not?

Post by pdavi21 » Sat Dec 01, 2018 12:41 pm

Sector funds can be a good hedge against your job / life. If you have cancer, it might be a good idea to invest in healthcare because as your costs rise, so does your portfolio. If you are a doctor, however, you would possibly want to underweight Healthcare.

Otherwise, I would avoid sector funds. One of the reasons Healthcare was so great recently is government subsidy through ACA.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by kolea » Sat Dec 01, 2018 12:58 pm

I would suggest that rather than analyzing the semantics of "what is an asset class", that you assess what your goals are and then asses whether investing separately in REITs helps you to better achieve those goals. After all, this is all about you and your portfolio and it matters little whether it meets some definition that not everybody agrees upon anyway.
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Re: Why are REITS a separate asset class but healthcare is not?

Post by FinancialRookie » Sat Dec 01, 2018 1:16 pm

retiredjg wrote:
Fri Nov 30, 2018 8:36 am

You'll notice that REITs or even real estate of any kind are not listed as a sector. I don't know why. Maybe REIT stocks fall into one of the categories. Maybe REIT stocks fall into several of the categories. Maybe they are something else entirely.
I have read that REIT's are classified under the Financial Services sector but I am not 100% on that.

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Re: Why are REITS a separate asset class but healthcare is not?

Post by vineviz » Sat Dec 01, 2018 2:25 pm

pdavi21 wrote:
Sat Dec 01, 2018 12:41 pm
Sector funds can be a good hedge against your job / life. If you have cancer, it might be a good idea to invest in healthcare because as your costs rise, so does your portfolio. If you are a doctor, however, you would possibly want to underweight Healthcare.
It'd be cool if this were true, but unfortunately it isn't.

Health care stocks are are almost entirely uncorrelated with health care costs.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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