Source: EFT Trends —
Real estate has had a historical role as a 3%–5% diversifier within equity and bond portfolios, but in the changing and challenged markets of 2022, real estate investment trusts (REITs) and the real estate sector broadly have proven to be fairly correlated to equities. Given both the outperformance of managed futures, a trend-following strategy that invests in the futures market, and the lack of correlation of futures to equities and bonds, the case could be made that managed futures now occupy that 5% diversifier sleeve within portfolios.
Advisors and investors have long used REITs — publicly traded companies that finance, own, or operate properties that produce income — and the real estate sector as a means to seek income and dividends, but also as diversification sleeves in their portfolios because of their historically low correlation to both equities and bonds. This role of REITs as portfolio diversifiers (and even as an individual asset class) has been questioned increasingly in recent years, and by looking at real estate’s performance this year, it has become clear that REITs are neither an optimal nor an effective diversifier in the changing market regime of 2022.
Real estate has historically been lumped into financials within indexes, but that changed in 2016 when the S&P 500 broke real estate out into its own sector. That sector now accounts for about 3% of the S&P 500, and in the changing market regime of 2022, that sector is moving analogously to the broader index.
For advisors and investors who are accustomed to slotting real estate into the diversification sleeves of their portfolios as an alternative to equities, it’s proved to be, well, a bit disappointing this year. The Vanguard Real Estate ETF (VNQ) has moved almost in lockstep with the S&P 500 this year — captured via the SPDR S&P 500 ETF Trust (SPY) in the above graph. The sector-specific Real Estate Select Sector SPDR Fund (XLRE) has performed slightly better but generally has trended very similarly to the S&P.
REITs Lean Into Innovation
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