REIT Fund

REIT funds definition


Real estate investment trusts (REITs) are companies that offer tradeable securities with underlying real estate assets; these assets may be mortgages, real property, or a combination of the two types of real estate holdings. A typical REIT fund incorporates a number of different REIT securities to provide diversification to investors; they generally are designed to hedge against losses in a particular sector or investment type. REITs enjoy favorable tax status, making REIT funds generally more profitable than comparable investments. However, since dividends paid by REITs and REIT funds are taxable when received, they may not be the best choice for tax-conscious investors.


Advantages


REIT funds typically perform inversely with the overall stock market. That is, they tend to do well during stock market downturns, and to be less successful when stock market performance is improving. This makes them a valuable hedge against fluctuations in the stock exchange. Additionally, real estate investments in general tend to be more stable and to produce solid earnings over time. Despite recent housing industry woes, the general direction of real estate values historically has been consistently upward, so REIT funds are a valuable addition to any well-balanced investment portfolio. Many analysts recommend that investors allocate as much as 20% of their total holdings to the REIT fund market.

Types of REIT funds


Because they are diversified portfolios of securities, REIT fund investments are available in a wide range of types and flavors. Exchange-traded REIT funds offer investors low fees and instant diversification; since they trade on the general financial exchanges, they are extremely accessible to new investors. Closed-end funds consist of a fixed number of shares and are usually only offered once to investors; after that, their earnings tend to outperform the general market, but usually feature greater risks than other types of REIT funds. Actively managed REIT funds typically incorporate a diverse and balanced range of REIT securities; as with any managed fund, however, the quality of analysis and the responsiveness of the manager make a significant difference in the results and earnings of the REIT fund. Passively managed REIT funds feature a similar mix of securities as major REIT indexes and provide instant diversification to investors; however, they typically are not as responsive to major changes in the REIT market environment.

REIT fund of funds


Providing optimal diversification across the full spectrum of the REIT marketplace, a REIT fund of funds typically includes both geographically and institutionally diverse real estate investments; that is, it comprises investments from a variety of locations and in a variety of types. Essentially, it serves as an index to a large portion of the REIT fund market and offers a convenient entry point to investors who are new to the REIT investment scene. These funds, including the REIT fund of funds investments, are typically a useful addition to any portfolio and provide solid performance even during stock market downturns.
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