Understanding REITs: How Do REITs Diversify Investment Portfolios?

REITs provide diversification to investment portfolios because an investment in REITs is an investment in commercial real estate – a different asset class from other stocks and bonds. While returns of other stocks generally follow the business cycle, REIT returns follow the real estate market cycle. This different market cycle means that REIT returns have a low-to-moderate correlation with those of other equities. Consequently REIT returns frequently “zig” when those of other equities “zag,” helping to reduce the volatility of the overall portfolio.