C
hristine Benz, Morningstar’s personal‑finance director, recently highlighted a trend that many income investors should revisit: real‑estate equities have become increasingly correlated with the broader U.S. equity market, eroding their traditional diversification advantage. While this observation might sound discouraging for REITs, it actually opens a window for strategic buying—particularly for the 8.4% yielding pick in our CEF Insider portfolio.
Benz’s point is that REITs have moved in tandem with stocks over the past two decades, suggesting they may not be the ideal hedge against equity volatility. Yet, a deeper look at the data tells a more nuanced story. The SPDR Dow Jones REIT ETF (RWR) has underperformed the S&P 500 for the last 25 years, lagging behind the index’s total return. During the 2000s housing boom, REITs outpaced the market, even maintaining a lead after the bubble burst until the pandemic hit both sectors. Today, REITs rise when stocks rise but do not rise as sharply when stocks fall, confirming Benz’s correlation claim.
Despite this, REITs still offer compelling reasons to hold. First, their dividend yields are substantially higher than the S&P 500’s. RWR currently pays 3.8%, while the S&P 500 yields just 1.1%. For investors targeting $100,000 in passive income, a REIT‑heavy allocation reduces the required capital. A portfolio split evenly between stocks and REITs, or one that leans on high‑yield closed‑end funds (CEFs), can lower the savings needed to reach that income goal.
Second, REITs provide a buffer when they trade at attractive prices. By buying when REITs are undervalued and selling when they’re overvalued, investors can capture gains that diverge from the broader market. Over the past three years, REITs have delivered roughly one‑third of the S&P 500’s gains, indicating untapped value.
Rather than settle for RWR’s modest payout, we recommend the Nuveen Real Estate Income Fund (JRS). This 8.4% yielding CEF delivers $100,000 in annual income for just $1.19 million—about an eighth of the capital required for an equivalent S&P 500 index fund. JRS offers broad diversification across 91 holdings, including Prologis (PLD), Ventas (VTS), and Equinix (EQIX). Over the last five years, JRS has outperformed RWR on a total‑return basis, even during a challenging real‑estate cycle.
JRS’s appeal is amplified by its discount to net asset value (NAV). Currently trading at a 6.5% discount, the fund offers a bargain that ETFs can’t match. Historically, JRS has traded at premium, especially in the 2000s and 2010s, but the discount has narrowed in recent years, presenting a timely buying opportunity. While the discount may eventually disappear, the long‑term track record suggests it will likely reappear, making patience a worthwhile strategy.
In summary, REITs remain a valuable component of an income portfolio. Their high yields and potential for undervalued buying justify continued exposure, even as correlations with equities rise. By leveraging high‑yield CEFs like JRS, investors can achieve significant income with less capital, outperform the market, and benefit from a discount that ETFs cannot provide.
