When your portfolio is loaded with stocks and not much else, many experts will tell you that real estate is one of the best ways to diversify. With the housing sector currently in slump in most places, this could be a good time to bottom fishing some undervalued properties.

But for those that do not wish to buy physical real estate, the use of Real Estate Investment Trusts is still a valid diversification strategy especially for investors who have a long term view.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

What Is a REIT?
A REIT trust company that accumulates a pool of money, through an initial public offering (IPO), which is then used to buy, develop, manage and sell assets in real estate. The IPO is identical to any other security offering with many of the same rules regarding prospectuses, reporting requirements and regulations; however, instead of purchasing stock in a single company, the owner of one REIT unit is buying a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing and selling of property and distributes it directly to the REIT holder on a regular basis. (For further explanation, read our article: What Are REITs?)

One of the most important advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income producing real estate, to their shareholders.

This following four REIT ETFs may be the answer to finding some value in a sector in crisis. (To learn more about ETFs, and how they work, read An Inside Look At ETF Construction.)

Company 2012 %Return
iShares Cohen & Steers Realty Majors ETF (NYSE:ICF) +8.40%
Vanguard REIT Index ETF (NYSE:VNQ) +8.80%
DJ Wilshire REIT ETF (NYSE:RWR) +8.20%
Wilshire US REIT ETF Inc. (NYSE:WREI) +8.90%

Bottom Line
Investors considering adding real estate to their portfolio must search beyond the fleeting promise of short term gains and choose investments with a long term goal of diversification in mind, such as REIT ETFs. (To see if REITs are the investment for you, read The REIT Way.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  2. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  3. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  4. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  5. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  6. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  7. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  10. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!