Why is Vanguard's REIT doing so poorly?

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Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

In the past I've read that REITs act as a bond proxy. And even within the last month I've seen journalists and bloggers advocate moving into REITs to hedge against virus fears specifically. But then this week comes along and VGSLX is down over 10% just like stocks. Is everything that directly correlated at this point or is there some specific explanation (like hotel holdings which could be impacted by travel drops, etc)?

And if it is something related to hotels, for example, I still don't fully understand that angle. It was my understanding that the REIT was investing in the companies that own the buildings, not the hotel companies themselves. So even if Marriott has 10% less people staying at a property they still have to make 100% of their lease payment, right? Defaults could go up of course, but overall I'm just surprised to see the REIT get hit just as hard as stocks.

Thoughts?
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Re: Why is Vanguard's REIT doing so poorly?

Post by Sandtrap »

CrankAddict wrote: Fri Feb 28, 2020 9:40 am In the past I've read that REITs act as a bond proxy. And even within the last month I've seen journalists and bloggers advocate moving into REITs to hedge against virus fears specifically. But then this week comes along and VGSLX is down over 10% just like stocks. Is everything that directly correlated at this point or is there some specific explanation (like hotel holdings which could be impacted by travel drops, etc)?

And if it is something related to hotels, for example, I still don't fully understand that angle. It was my understanding that the REIT was investing in the companies that own the buildings, not the hotel companies themselves. So even if Marriott has 10% less people staying at a property they still have to make 100% of their lease payment, right? Defaults could go up of course, but overall I'm just surprised to see the REIT get hit just as hard as stocks.

Thoughts?
REIT's Index Funds are not "bond proxies", they are equities with a slightly different correlation to equity movements.

For example: (not always), if market equities falls by X percent, REIT Index Funds might fall not as much. And so forth.

This is one of the points of diversifying underlying funds whether in equities or fixed. Not all subscribe to this, some do.

Nothing in the market is "directly correlated" except for 2 identical funds. Things are just unpredictably "differently correlated".
You can research online data and past forum threads and find REIT correlations to market movement quoted from .3 to .68 and everywhere else as well depending on period of time.

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Re: Why is Vanguard's REIT doing so poorly?

Post by yohac »

When people decide they want out of risky assets (including REITS) they dump them. It becomes all about self-preservation. Logic about the particular asset class flies out the window.
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Re: Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

Sandtrap wrote: Fri Feb 28, 2020 9:49 am REIT's Index Funds are not "bond proxies", they are equities with a slightly different correlation to equity movements.

j :happy
To be clear, I didn't mean to suggest they were literally tied bonds, but if you do a search for "REIT bond proxy" you'll see dozens of articles describing them as being correlated to bond movements. The takeaway being that in general, a market will view them as less risky than stocks and when conditions are right for bonds to go up, then REITs, utilities, and others will go up as well.

This summer I added REITs to my AA as an attempt to diversify my 85% stock / 15% bond situation more, but of course this week it doesn't seem to be doing much for me and I was just curious if there was an explanation (other than me owning it which usually is sufficient grounds for things to go wrong :D ).
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Re: Why is Vanguard's REIT doing so poorly?

Post by JAZZISCOOL »

I disagree that REIT's should be held as a "bond proxy".

From another BH thread I posted this regarding the high expected correlation between REIT's and equities.

Re: REIT's and Rick Ferri
Post by JAZZISCOOL » Tue Feb 18, 2020 7:04 pm

JP Morgan uses correlation assumptions between US REIT's and US large, mid and small cap stocks of over +0.7 for (2020). While this is a forward-looking estimate, it's quite high.

FWIW, Schwab recommends a max of 5% in REIT's in one article they post on their site given REIT's have higher volatility (i.e. risk). That said, risk varies over time/market cycles:

"Due to their higher volatility relative to U.S. large-cap stocks (22% vs. 14%), REITs should constitute no more than 5% of your portfolio, separate from any REITs that may be part of your other stock allocations (in other words, this suggested allocation would be over and above REITs’ negligible sector allocation of 3% within the S&P 500 index)." YMMV. People may want different portfolio biases.

I think direct RE funds probably have better diversification benefits but those are often restricted to HNW/accredited investors and have higher fees (also there's the illiquidity you may have to deal with).

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Re: Why is Vanguard's REIT doing so poorly?

Post by Nate79 »

REIT's are not bond proxies in any way shape or form. They are stocks. If you search in the search bar this subject/question has been covered hundreds of times.
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Re: Why is Vanguard's REIT doing so poorly?

Post by KyleAAA »

REITs are definitely not a bond proxy. I'm not familiar with the logic by which REITs would be viewed by some as protection against virus fears, but off the top of my head I don't see it.
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Re: Why is Vanguard's REIT doing so poorly?

Post by retiredjg »

Maybe some people think that REITs are "bond substitutes" because they pay dividends?

But REITs are stocks and they act like stocks. They just happen to be stocks with special rules.
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Re: Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

From the WSJ "Sometimes called 'bond proxies,' REITs buy up properties and pass on the bulk of profits to shareholders..."

From a CNBC interview with Morgan Stanley "Viewed as bond proxies, REITs and utilities remain the No. 1 and No. 2 sectors in the S&P 500..."

There are tons of other examples, but I'm not just making up the terminology. I was just wondering if there was some actual link to why the Vanguard REIT specifically is down. It just doesn't make logical sense to me that real estate would be impacted at this point due to the virus.
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Re: Why is Vanguard's REIT doing so poorly?

Post by Kenkat »

I am not sure of the definition of “bond proxy”. They are clearly not the same as bonds as we can see in this recent market drop. They do have so similarities to bonds - they are interest rate sensitive like bonds and they pay higher dividends like bonds but as we are seeing, they are still stocks and that is the primary driver of their behavior and returns. My REIT fund is still positive for the year and towards the top of my equity funds YTD but they’ve been falling hard recently along with the rest of the stock market.
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Re: Why is Vanguard's REIT doing so poorly?

Post by nisiprius »

CrankAddict wrote: Fri Feb 28, 2020 9:40 am In the past I've read that REITs act as a bond proxy.
I'm sorry that you have read that.

I can't get into the mind of someone who uses the phrase "bond proxy," and tell you what they mean by "proxy." REITs are stocks and they act like stocks. The only possible meaning would be "if you put a gun to my head and said "what kind of stock is most like a bond?" then, rather than die, I might blurt out "REITs." And if you put a gun to my head and said "What kind of dog is most like a cat," I might say "a xoloitzcuintli." And get shot while I was trying to remember whether you spell xoloitzcuintli with an i-o or an o-i.

Image

Here is how the Vanguard REIT Index Fund (blue) and the Vanguard Total Bond Market Index Fund (green) behaved in 2008-2009. The resemblance is not close. For example, one went up and one went down. I would not say that losing $6,000 of your money is a good "proxy" for making you $400. Actually I think the xoloitzcuintli is better "proxy" for a hairless cat than a REIT index fund is for a bond fund.

Image
And even within the last month I've seen journalists and bloggers advocate moving into REITs to hedge against virus fears specifically. But then this week comes along and VGSLX is down over 10% just like stocks. Is everything that directly correlated at this point or is there some specific explanation (like hotel holdings which could be impacted by travel drops, etc)?
The easy explanation, and I think it's right, is that REITs are down because REITs are stocks and stocks are down.
And if it is something related to hotels, for example, I still don't fully understand that angle. It was my understanding that the REIT was investing in the companies that own the buildings, not the hotel companies themselves. So even if Marriott has 10% less people staying at a property they still have to make 100% of their lease payment, right? Defaults could go up of course, but overall I'm just surprised to see the REIT get hit just as hard as stocks.

Thoughts?
Yeah. Don't trust all the confident-sounding junk you hear that tries to explain why and how different investments behave. Shocking as it may seem, an awful lot of it is nonsense, and quite a lot is corrupted by self-interest.

The xoloitzcuintle is the one on the left.
Last edited by nisiprius on Fri Feb 28, 2020 11:07 am, edited 5 times in total.
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Re: Why is Vanguard's REIT doing so poorly?

Post by yohac »

REITs are down for the same reason that gold miners and utilities are down double digits this week: Blind fear.
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Re: Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

Ok, let's put the apparently controversial "bond proxy" term aside for now.

Here is my core confusion... I bought REITs with the impression that they were a mutual fund packaged way to invest in real estate. Period. Am I wrong on that premise??

My house is not worth 10% less than it was last week. And renting a downtown office is not 10% cheaper than it was last week. So if real estate itself is not dropping like a rock then why is my REIT other than just FUD killing everything that isn't an actual bond. I just now looked and I see that Vanguard's utility index fund (which I don't own) is down 10% as well. So yeah, I'm guessing just fear, no logic...

EDIT: I see yohac posted at the same time as me. The forum keeps timing out on me (as does the vanguard site itself). Definitely some fear in the air :)
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Re: Why is Vanguard's REIT doing so poorly?

Post by ObliviousInvestor »

CrankAddict wrote: Fri Feb 28, 2020 11:08 am Here is my core confusion... I bought REITs with the impression that they were a mutual fund packaged way to invest in real estate. Period. Am I wrong on that premise??
Well, yes (to an extent).

A REIT is a stock. It's a company. You did not buy real estate. Instead you bought a mutual fund of stocks.

Yes, it's true (and important) that the companies in question are in the real estate industry. But there's a meaningful difference between owning real estate directly and owning a REIT fund.
CrankAddict wrote: Fri Feb 28, 2020 11:08 am My house is not worth 10% less than it was last week. And renting a downtown office is not 10% cheaper than it was last week. So if real estate itself is not dropping like a rock then why is my REIT other than just FUD killing everything that isn't an actual bond. I just now looked and I see that Vanguard's utility index fund (which I don't own) is down 10% as well. So yeah, I'm guessing just fear, no logic...
Even if the price of an office lease downtown is no less than it was last week, it's quite possible that the company that owns that office space is expected to be somewhat less profitable going forward as a result of the news. (Maybe they're expected to have more trouble finding tenants at the price in question than they would have otherwise. Maybe they're expected to incur a lot of costs they hadn't planned on, as a result of their workforce having to work remotely, or as a result of people missing work completely due to illness.)
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Re: Why is Vanguard's REIT doing so poorly?

Post by KyleAAA »

CrankAddict wrote: Fri Feb 28, 2020 11:08 am Ok, let's put the apparently controversial "bond proxy" term aside for now.

Here is my core confusion... I bought REITs with the impression that they were a mutual fund packaged way to invest in real estate. Period. Am I wrong on that premise??

My house is not worth 10% less than it was last week. And renting a downtown office is not 10% cheaper than it was last week. So if real estate itself is not dropping like a rock then why is my REIT other than just FUD killing everything that isn't an actual bond. I just now looked and I see that Vanguard's utility index fund (which I don't own) is down 10% as well. So yeah, I'm guessing just fear, no logic...

EDIT: I see yohac posted at the same time as me. The forum keeps timing out on me (as does the vanguard site itself). Definitely some fear in the air :)
REITs, like all stocks, are valued by discounting future cash flows to the present. They are not based on the value of the properties owned. So from a valuation perspective, it is irrelevant whether or not the value of the building dropped 10% last week (it may have, we don't know). What if a pandemic causes businesses to shut down for a prolonged period of time? Not all businesses will survive, which means an uptick in vacancies, which will hurt the REIT's bottom line. The drop in price is a rational response to that possibility. The larger or less known a risk is, the more prices will need to drop to account for it in a rational market. Coronavirus may turn out to be minor, but it may turn out to be a massive, massive financial risk. It may threaten the very existence of many businesses and hence their landlords. Since you can't actually quantify the future risk at this point, it is logical to discount what you are willing to pay for a company. It isn't fear, it's how investors mitigate risk.

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Re: Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

Thanks, guys. The perhaps not-so-subtle difference between owning real estate and owning a REIT is finally starting to sink in. Related question: does Vanguard (or anybody) offer a fund which is a more direct analog to real estate ownership?
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Re: Why is Vanguard's REIT doing so poorly?

Post by KyleAAA »

CrankAddict wrote: Fri Feb 28, 2020 2:03 pm Thanks, guys. The perhaps not-so-subtle difference between owning real estate and owning a REIT is finally starting to sink in. Related question: does Vanguard (or anybody) offer a fund which is a more direct analog to real estate ownership?
The only real option here is https://www.tiaa.org/public/retire/fina ... te-account

You could also try some of the RE crowdfunding companies out there like Fundrise.
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Re: Why is Vanguard's REIT doing so poorly?

Post by DB2 »

Utility stocks not bond proxies either before anyone asks.
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Re: Why is Vanguard's REIT doing so poorly?

Post by annu »

They are down due to fear, covid 9 is very unique event, when fear drives you, all sense out of the window......I am looking forward to hitting 80 and will buy by selling most of my bonds, as bond yields will be impacted even more when feds do another cut in March
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Re: Why is Vanguard's REIT doing so poorly?

Post by BillyK »

I have held it for 20 years or so and it has always been volatile. It is probably one of the least bond like equity funds I have held. I am not a real strict adherent to rebalancing, but it is the one fund I do keep a close eye on and rebalance more often than with other funds.
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Re: Why is Vanguard's REIT doing so poorly?

Post by GAAP »

The PV Asset Class Correlations page https://www.portfoliovisualizer.com/ass ... ations?s=y illustrates both the correlations between the asset classes and the volatility of those classes.

Vanguard Total Bond Market ETF (BND) has only a 0.28 correlation with Vanguard Real Estate ETF (VNQ) -- an extremely poor proxy. In fact, VNQ is a much better, if still poor, proxy for Vanguard Total Stock Market ETF (VTI) at 0.65.

BND has an annualized standard deviation of 3.10%, whereas VNQ has an annualized volatility of 16.16% which is actually even higher than the 13.12% volatility for VTI.

In summary, you basically got what you paid for. That does not make VNQ a "bad investment", but it sounds like it did make it a "bad investment for the purpose".
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Re: Why is Vanguard's REIT doing so poorly?

Post by Northern Flicker »

If you look at moving averages of REIT returns, to smooth out volatility, they will look more like real estate. But a REIT is a stock, generally a small cap or mid cap stock. Over sufficiently long periods, they should have a pretty good correlation to the return of the property they hold. Over shorter terms, business risk, leverage, liquidity risk and other factors give them the volatility of small-cap stocks. They tend to have sensitivity to interest rates like bonds do, but they are not bond proxies.

There are mortgage REITs which behave more like a levered portfolio of mortgages, still more volatile than investment grade bonds.
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Re: Why is Vanguard's REIT doing so poorly?

Post by veggivet »

They may be marketed as 'bond fund proxies', but now you know that they're not.
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Re: Why is Vanguard's REIT doing so poorly?

Post by UpperNwGuy »

Why buy a bond proxy? If your portfolio needs bonds, buy bonds, not proxies.
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Re: Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

UpperNwGuy wrote: Sat Feb 29, 2020 8:27 pm Why buy a bond proxy? If your portfolio needs bonds, buy bonds, not proxies.
Agreed, and my portfolio is 30% straight bonds. The REIT component was intended to add an additional, non-bond asset class which acted as a safe harbor in times where the market was moving away from "pure stocks" (for lack of a better term). This was my, apparently incorrect, interpretation of the "bond proxy" term. Of course I knew they weren't bonds and didn't believe anybody was saying that they were. I thought the implication was that they had a "bond like" property in that in bearish times they'd do better than the S&P 500, for example.

The book "Investing in REITs" by Ralph Block has the following quote:

"Another type of REIT that often appeals to some investors is one that I refer to as a bond proxy. It is perceived as having a relatively slow FFO and dividend growth rate, but, because of its moderate debt and stable properties, it has a reasonably secure dividend with a yield that is usually higher than that of most REITs. Adjectives like reliable and consistent describe these REITs, which do not have aggressive external growth strategies and often own properties with long-term leases. Those seeking bond proxies should look for conservative, capable, and dedicated management teams, moderate debt levels, and a substantial, well-covered dividend. Growth and capital appreciation, of course, are likely to remain modest."

So here again we have somebody who knows enough about REITs to have written an entire book on the topic using the proxy terminology. But it also seems to suggest that some REITs would achieve my stated goal better than others. Perhaps I need to explore that aspect further.
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Re: Why is Vanguard's REIT doing so poorly?

Post by Sandtrap »

CrankAddict wrote: Fri Feb 28, 2020 2:03 pm Thanks, guys. The perhaps not-so-subtle difference between owning real estate and owning a REIT is finally starting to sink in. Related question: does Vanguard (or anybody) offer a fund which is a more direct analog to real estate ownership?
Not really.
Not directly.

Many think comparing REIT's to physically held R/E is like comparing apples and oranges.
However:
Comparing REIT's to physically held R/E is like compairing a car oil filter to a duck.

The similarity is the name "Real Estate investment trust" "Real Estate", and they both involve buildings or shares in buildings, land, etc, etc.

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Re: Why is Vanguard's REIT doing so poorly?

Post by grok87 »

ObliviousInvestor wrote: Fri Feb 28, 2020 11:28 am
CrankAddict wrote: Fri Feb 28, 2020 11:08 am Here is my core confusion... I bought REITs with the impression that they were a mutual fund packaged way to invest in real estate. Period. Am I wrong on that premise??
Well, yes (to an extent).

A REIT is a stock. It's a company. You did not buy real estate. Instead you bought a mutual fund of stocks.

Yes, it's true (and important) that the companies in question are in the real estate industry. But there's a meaningful difference between owning real estate directly and owning a REIT fund.
CrankAddict wrote: Fri Feb 28, 2020 11:08 am My house is not worth 10% less than it was last week. And renting a downtown office is not 10% cheaper than it was last week. So if real estate itself is not dropping like a rock then why is my REIT other than just FUD killing everything that isn't an actual bond. I just now looked and I see that Vanguard's utility index fund (which I don't own) is down 10% as well. So yeah, I'm guessing just fear, no logic...
Even if the price of an office lease downtown is no less than it was last week, it's quite possible that the company that owns that office space is expected to be somewhat less profitable going forward as a result of the news. (Maybe they're expected to have more trouble finding tenants at the price in question than they would have otherwise. Maybe they're expected to incur a lot of costs they hadn't planned on, as a result of their workforce having to work remotely, or as a result of people missing work completely due to illness.)
OP may be interested in the TIAA Real Estate Annuity, if eligible, which is up 0.1% YTD
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Re: Why is Vanguard's REIT doing so poorly?

Post by UpperNwGuy »

CrankAddict wrote: Sun Mar 01, 2020 8:39 am
UpperNwGuy wrote: Sat Feb 29, 2020 8:27 pm Why buy a bond proxy? If your portfolio needs bonds, buy bonds, not proxies.
Agreed, and my portfolio is 30% straight bonds. The REIT component was intended to add an additional, non-bond asset class which acted as a safe harbor in times where the market was moving away from "pure stocks" (for lack of a better term). This was my, apparently incorrect, interpretation of the "bond proxy" term. Of course I knew they weren't bonds and didn't believe anybody was saying that they were. I thought the implication was that they had a "bond like" property in that in bearish times they'd do better than the S&P 500, for example.

The book "Investing in REITs" by Ralph Block has the following quote:

"Another type of REIT that often appeals to some investors is one that I refer to as a bond proxy. It is perceived as having a relatively slow FFO and dividend growth rate, but, because of its moderate debt and stable properties, it has a reasonably secure dividend with a yield that is usually higher than that of most REITs. Adjectives like reliable and consistent describe these REITs, which do not have aggressive external growth strategies and often own properties with long-term leases. Those seeking bond proxies should look for conservative, capable, and dedicated management teams, moderate debt levels, and a substantial, well-covered dividend. Growth and capital appreciation, of course, are likely to remain modest."

So here again we have somebody who knows enough about REITs to have written an entire book on the topic using the proxy terminology. But it also seems to suggest that some REITs would achieve my stated goal better than others. Perhaps I need to explore that aspect further.
OP, I think you want to like REITs despite your growing realization that they are not what you hoped they would be.
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Re: Why is Vanguard's REIT doing so poorly?

Post by averagedude »

I think that if your house was divided out into shares, and it was possible that these shares could be traded like stocks, you could easily see a 10% decline in a week on the value of your home.
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Re: Why is Vanguard's REIT doing so poorly?

Post by rich126 »

UpperNwGuy wrote: Sat Feb 29, 2020 8:27 pm Why buy a bond proxy? If your portfolio needs bonds, buy bonds, not proxies.
My guess is that people are trying to increase their returns. Why did a lot of people move to high yield funds? They weren't happy with low yields on bonds.(The BND fund has gone up over the last week, its safe to say high yield funds did not.)
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Re: Why is Vanguard's REIT doing so poorly?

Post by watchnerd »

CrankAddict wrote: Fri Feb 28, 2020 9:40 am In the past I've read that REITs act as a bond proxy.
No, they're stocks in a particular sector.
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Re: Why is Vanguard's REIT doing so poorly?

Post by watchnerd »

CrankAddict wrote: Fri Feb 28, 2020 11:08 am
Here is my core confusion... I bought REITs with the impression that they were a mutual fund packaged way to invest in real estate. Period. Am I wrong on that premise??
Pretty wrong -- REITs are not hard assets.

They're businesses that are required to pass along a lot their earnings to the shareholders. They're especially sensitive to interest rates.

REITs funds are a mutual fund packaged way to invest in *companies* that invest in real estate.
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Re: Why is Vanguard's REIT doing so poorly?

Post by Uncorrelated »

CrankAddict wrote: Sun Mar 01, 2020 8:39 am
UpperNwGuy wrote: Sat Feb 29, 2020 8:27 pm Why buy a bond proxy? If your portfolio needs bonds, buy bonds, not proxies.
Agreed, and my portfolio is 30% straight bonds. The REIT component was intended to add an additional, non-bond asset class which acted as a safe harbor in times where the market was moving away from "pure stocks" (for lack of a better term). This was my, apparently incorrect, interpretation of the "bond proxy" term. Of course I knew they weren't bonds and didn't believe anybody was saying that they were. I thought the implication was that they had a "bond like" property in that in bearish times they'd do better than the S&P 500, for example.

The book "Investing in REITs" by Ralph Block has the following quote:

"Another type of REIT that often appeals to some investors is one that I refer to as a bond proxy. It is perceived as having a relatively slow FFO and dividend growth rate, but, because of its moderate debt and stable properties, it has a reasonably secure dividend with a yield that is usually higher than that of most REITs. Adjectives like reliable and consistent describe these REITs, which do not have aggressive external growth strategies and often own properties with long-term leases. Those seeking bond proxies should look for conservative, capable, and dedicated management teams, moderate debt levels, and a substantial, well-covered dividend. Growth and capital appreciation, of course, are likely to remain modest."

So here again we have somebody who knows enough about REITs to have written an entire book on the topic using the proxy terminology. But it also seems to suggest that some REITs would achieve my stated goal better than others. Perhaps I need to explore that aspect further.
This isn't what you want to hear, but 90% of books on investing are complete nonsense. Even on this forum, most of what you'll hear is wrong.

AFAIK the current state of the art in REIT research is the paper Are REITs a Distinct Asset Class?. They claim that when corrected for Fama & French factors and bond factors, REIT's have a small but statistically insignificant negative return. A similar paper for Turkey also exists, which does find a statistically significant risk factor with negative return.

If you don't know what you're doing, just buy total stock market and total bond market. The amount of non-scientific nonsense that you can find about REIT's is really absurd.
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Re: Why is Vanguard's REIT doing so poorly?

Post by watchnerd »

Good reasons to own REITs:

--You want / need yield


Not so good reasons to own REITs:

--You want hard assets (they're equity shares in businesses that own hard or operate assets, not hard assets themselves)

--You want something that isn't a stock (they're stocks)


Other considerations:

--You want to sector-tilt (as one might do for energy, healthcare, etc.) because you think it will offer better risk/reward than the general market

--You want to make an interest-rate change play using something that isn't a bond
Last edited by watchnerd on Sun Mar 01, 2020 3:06 pm, edited 1 time in total.
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Re: Why is Vanguard's REIT doing so poorly?

Post by bikechuck »

CrankAddict wrote: Fri Feb 28, 2020 2:03 pm Thanks, guys. The perhaps not-so-subtle difference between owning real estate and owning a REIT is finally starting to sink in. Related question: does Vanguard (or anybody) offer a fund which is a more direct analog to real estate ownership?
I own a real estate fund through TIAA with the symbol TREA (might also be known as QREARX) that invests directly in real estate. It has been yielding 5% a year recently and over time has been less volitle than REITs. I checked yesterday and it is flat year to date. It was up 5% in 2008 when equities were down by double digits.
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Re: Why is Vanguard's REIT doing so poorly?

Post by AerialWombat »

watchnerd wrote: Sun Mar 01, 2020 11:29 am
CrankAddict wrote: Fri Feb 28, 2020 11:08 am
Here is my core confusion... I bought REITs with the impression that they were a mutual fund packaged way to invest in real estate. Period. Am I wrong on that premise??
Pretty wrong -- REITs are not hard assets.

They're businesses that are required to pass along a lot their earnings to the shareholders. They're especially sensitive to interest rates.

REITs funds are a mutual fund packaged way to invest in *companies* that invest in real estate.
+1

So much so that many REITs don't own a single square inch of land, not one brick of a building, or even manage any physical properties. A REIT is, more than anything else, a tax classification.
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Re: Why is Vanguard's REIT doing so poorly?

Post by AerialWombat »

Sandtrap wrote: Sun Mar 01, 2020 9:03 am
CrankAddict wrote: Fri Feb 28, 2020 2:03 pm Thanks, guys. The perhaps not-so-subtle difference between owning real estate and owning a REIT is finally starting to sink in. Related question: does Vanguard (or anybody) offer a fund which is a more direct analog to real estate ownership?
Not really.
Not directly.

Many think comparing REIT's to physically held R/E is like comparing apples and oranges.
However:
Comparing REIT's to physically held R/E is like compairing a car oil filter to a duck.

The similarity is the name "Real Estate investment trust" "Real Estate", and they both involve buildings or shares in buildings, land, etc, etc.

j :happy
Sandtrap: Oil filter:duck. Great analogy. :)

OP: If you want a direct analog to real estate ownership, then own real estate. :beer
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Re: Why is Vanguard's REIT doing so poorly?

Post by watchnerd »

If I want to own pineapples, I shouldn't buy shares in Dole.
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Re: Why is Vanguard's REIT doing so poorly?

Post by AerialWombat »

watchnerd wrote: Sun Mar 01, 2020 3:08 pm If I want to own pineapples, I shouldn't buy shares in Dole.
Great analogy!
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Re: Why is Vanguard's REIT doing so poorly?

Post by CrankAddict »

watchnerd wrote: Sun Mar 01, 2020 3:08 pm If I want to own pineapples, I shouldn't buy shares in Dole.
Sure, and I get that if your goal is to simply eat pineapples. But if you believe that the sale of fruit is a profitable business is it more practical to buy Dole or buy some tractors and seeds? In my simple mind we live in world where the selling of fruit's profitability should be decoupled from, say, the selling of TVs.

But I guess my main takeaway from all of this is that the notion of stock "sectors" seems to be more hype than substance. Real estate and utility stocks seem to largely just track the rest of the market, so why bother trying to be specific? Just treat "stocks" as one opaque bucket, buy total market, and move on. Trying to pick funds by industry based on some perceived notion of diversification doesn't seem to be doing what I hoped it would.
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Re: Why is Vanguard's REIT doing so poorly?

Post by watchnerd »

CrankAddict wrote: Mon Mar 09, 2020 2:28 pm
watchnerd wrote: Sun Mar 01, 2020 3:08 pm If I want to own pineapples, I shouldn't buy shares in Dole.
Sure, and I get that if your goal is to simply eat pineapples. But if you believe that the sale of fruit is a profitable business is it more practical to buy Dole or buy some tractors and seeds? In my simple mind we live in world where the selling of fruit's profitability should be decoupled from, say, the selling of TVs.

But I guess my main takeaway from all of this is that the notion of stock "sectors" seems to be more hype than substance. Real estate and utility stocks seem to largely just track the rest of the market, so why bother trying to be specific? Just treat "stocks" as one opaque bucket, buy total market, and move on. Trying to pick funds by industry based on some perceived notion of diversification doesn't seem to be doing what I hoped it would.
+1.

My POV is the same.
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Re: Why is Vanguard's REIT doing so poorly?

Post by StormShadow »

watchnerd wrote: Sun Mar 01, 2020 1:37 pm Good reasons to own REITs:

--You want / need yield


Not so good reasons to own REITs:

--You want hard assets (they're equity shares in businesses that own hard or operate assets, not hard assets themselves)

--You want something that isn't a stock (they're stocks)


Other considerations:

--You want to sector-tilt (as one might do for energy, healthcare, etc.) because you think it will offer better risk/reward than the general market

--You want to make an interest-rate change play using something that isn't a bond
You forgot the main reason folks invest in REITs: Poor correlation with the overall stock market and bonds.
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