The debate surrounding whether individual investors can consistently outperform the S&P 500 is a familiar one, often met with skepticism. However, evidence suggests that achieving such results is not as daunting as it’s made out to be. For instance, investing in exchange-traded funds (ETFs) that focus on specific sectors, particularly real estate investment trusts (REITs), can lead to superior returns. Over the past two decades, the SPDR Dow Jones REIT ETF (RWR) has notably outperformed the S&P 500, achieving this success despite facing challenges such as the subprime mortgage crisis and the COVID-19 pandemic, which significantly impacted the real estate market.
It’s essential to clarify that while diversifying into REITs can provide substantial long-term wealth accumulation, it does not imply that investors should abandon traditional stocks altogether. Historical trends indicate that REITs can experience more pronounced declines during economic crises, necessitating a balanced portfolio to mitigate risks. A diversified investment in REITs enables investors to gain exposure to numerous properties simultaneously, ensuring a robust investment in real estate without the complexities of direct ownership. Additionally, REITs often offer appealing dividend yields, exemplified by RWR’s yield of 3.3%, which significantly surpasses the typical yield from S&P 500 stocks.
While REITs have previously outperformed the S&P 500, recent market dynamics indicate that stocks have started to catch up, especially during the stock market recovery in 2023 and early 2024. The S&P 500 has successfully surpassed its prior highs, yet REITs appear to be lagging, primarily due to the impact of high interest rates on their borrowing costs. As REITs require financing to acquire and manage properties, the swift rise in interest rates over the past couple of years has ultimately suppressed their performance relative to stocks.
Looking ahead, the Federal Reserve’s decision to begin cutting rates has opened new opportunities for REITs to regain momentum. As borrowing costs decrease, the profitability of REITs is poised to improve, which could translate into a resurgence in their value. Notably, current market conditions suggest that the potential for further rate cuts has not been fully reflected in REIT valuations, making them an attractive investment option, particularly in the context of soaring stock prices that lack strong economic justification.
While RWR serves as a solid entry point into REIT investments, investors seeking better returns might want to consider higher-yielding closed-end funds (CEFs). An exemplary alternative is the Cohen & Steers Quality Income Realty Fund (RQI), boasting a yield of around 7%, which is double that of RWR. Over its history since 2002, RQI has significantly outperformed RWR, showcasing a remarkable 711% total return. This performance, combined with a slight current discount on its market value, underscores the likelihood of sustained growth for RQI as lower interest rates attract attention to the undervaluation of REITs compared to stocks.
Ultimately, sharing insight into potential investments like RQI can provide individual investors with the strategies needed to build and protect their wealth. With attractive yields, historical performance, and favorable market conditions, REITs represent a compelling option for diversifying investment portfolios. By recognizing the overall advantages of real estate investments and the promise of sustained dividends, investors can take practical steps toward achieving financial prosperity in the ever-evolving market landscape.