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2 Consistent and Solid REIT Funds

Diversification and income benefits can make REITs attractive even if rates head higher.

David Kathman: Real estate mutual funds have had a rough time lately. They lost almost 7% on average in the first quarter of 2018, which was one of the worst returns of any Morningstar category. Anticipation of higher interest rates is one big reason for that, since REITs tend to be rate-sensitive, and also retail REITs have been hammered by the threat of online retail. 

This kind of short-term bump in the road isn't a good reason for investors to jump ship, though, because these funds can play an important role in diversifying a portfolio, given that real estate tends not to be very highly correlated with the broader stock or bond markets. They can also be a decent source of income, since REITs have to pay out at least 90% of their profits as dividends. 

REIT funds as a group have had a lot of ups and downs over the past decade, but the top funds in the category have been pretty consistent and solid. They include T. Rowe Price Real Estate, the one fund in the category with a Morningstar Analyst Rating of Gold; and Silver-rated Vanguard Real Estate Index, which is the top passive option.

David Kathman has a position in the following securities mentioned above: VGSIX. Find out about Morningstar’s editorial policies.