A Guide To Reits: Fidelity's Reit Investment Strategies

Real Estate Investment Trusts (REITs) are a great way to invest in real estate without the hassle of owning and managing properties. REITs are companies that own, operate, or finance income-generating real estate, and they are required to distribute 90% of their income to investors as dividends. They are a good investment option as they offer attractive yields, diversification, and capital appreciation.

Fidelity offers a range of REIT investment options, including mutual funds and ETFs, which can help investors gain exposure to the real estate sector. With careful security selection, investors can find attractively priced opportunities in volatile markets and manage the risks associated with REITs.

Before investing in any mutual fund or exchange-traded fund, it is important to consider its investment objective, risks, charges, and expenses.

REITs as part of a diversified portfolio

Real estate is a crucial asset class that every investor should consider for a well-diversified portfolio. Real estate investment trusts (REITs) are an efficient way to diversify investments, reduce risk, and increase long-term returns.

REITs are companies that own or finance income-producing real estate across various property sectors, such as retail, healthcare, and residential. They are required to pay out 90% of their taxable income to shareholders, resulting in high-yield dividends.

REITs provide added diversification to a portfolio. They can counterbalance stocks, bonds, and cash due to their ability to generate dividend income and capital appreciation. Their comparatively low correlation with other assets helps reduce overall portfolio risk and increase returns.

When investing in REITs, individuals can choose to invest in companies individually, through an exchange-traded fund, real estate crowdfunding, or a mutual fund. Fidelity, for example, offers a range of mutual funds and ETFs that provide exposure to the real estate sector, including the Fidelity Real Estate Investment Portfolio and the Fidelity MSCI Real Estate ETF.

It is important to note that not all REITs are the same. Some invest directly in properties, earning rental income and management fees, while others focus on real estate debt, such as mortgages and mortgage-backed securities. Additionally, REITs tend to specialize in specific sectors, so it is crucial to assess the industry and the REITs themselves before investing.

How to find REITs on the Fidelity website

To find REITs on the Fidelity website, you can use the Stock Screener tool on Fidelity.com. Here are the steps to follow:

• Go to "News and Research", then select "Stocks".
• Click on "Screener Tools" and then "Start a Screen".
• Filter your search by either "Security Type" and select "Common Stock (REIT)", or by "Sector/Industry/SubIndustry" and choose "Real Estate".

Using this method, you can specifically look for REITs (Real Estate Investment Trusts) on the Fidelity website.

Additionally, you can also find mutual funds and Exchange-Traded Funds (ETFs) offered by Fidelity that provide exposure to real estate investments. These can be good options if you want to invest in a diversified portfolio of REITs without having to pick individual companies.

Remember, when investing in REITs or any other financial product, it is important to do your own research and understand the risks involved.

REITs vs. Real Estate Funds

Real Estate Investment Trusts (REITs) are corporations, trusts, or associations that invest directly in income-producing real estate. They are traded like stocks, and they pay out regular dividends. REITs allow investors to make money from real estate without owning or managing properties themselves. They are a low-cost way to invest in the real estate market, with a much lower entry point than direct real estate investing. There are three main types of REITs: Equity REITs, Mortgage REITs, and Hybrid REITs.

Real Estate Funds are a type of mutual fund that primarily invests in securities offered by public real estate companies, including REITs. They provide value through appreciation. There are three types of real estate funds: Real Estate Exchange-Traded Funds (REIT-ETF), Real Estate Mutual Funds, and Private Real Estate Investment Funds. Real estate funds can offer broader asset selection and diversification than buying individual REITs.

REITs and Real Estate Funds are both ways to diversify an investment portfolio. However, REITs are more liquid and are traded on major exchanges, whereas Real Estate Funds don't trade like stocks and share prices are updated only once a day. REITs are suitable for investors seeking income through dividends, while Real Estate Funds are attractive to longer-term investors due to their focus on appreciation.

Fidelity offers various Real Estate investment options, including the Fidelity Real Estate Investment Portfolio, the Fidelity Real Estate Index Fund, the Fidelity MSCI Real Estate ETF, and the Fidelity Real Estate Income Fund. These funds can help investors gain exposure to the real estate sector.

Types of REITs: Equity vs. Mortgage

There are two main types of REITs: equity REITs and mortgage REITs (mREITs). Each has a different approach to investing in real estate.

Equity REITs

Equity REITs are the most common type of REIT. They are an investment in a company that deals with income-producing real estate. This includes buying, building, renovating, managing, and selling properties. Equity REITs generate revenue through rents paid by tenants and the sales of the properties they own. Most REITs operate as equity REITs, providing investors with access to diverse portfolios of income-producing assets. These companies own properties across various real estate sectors, such as office buildings, shopping centres, and apartment complexes. They are required to distribute a large portion of their income to shareholders as dividends.

Mortgage REITs (mREITs)

Mortgage REITs, on the other hand, deal with the financial side of real estate. They provide financing for income-producing properties by purchasing or originating mortgages and mortgage-backed securities (MBS). The income for mREITs is derived from the interest payments made on these mortgages. Mortgage REITs tend to perform better when interest rates are rising.

Risks of Each

Both types of REITs come with their own set of risks. Equity REITs tend to be cyclical, making them sensitive to economic downturns and recessions. They can also be affected by an oversupply of properties, leading to higher vacancies and lower rental income. Mortgage REITs, meanwhile, are vulnerable to changes in interest rates. When interest rates decrease, more borrowers choose to refinance or repay their mortgages, forcing the REIT to reinvest at a lower rate.

Suitability for Investors

Equity REITs may appeal to buy-and-hold investors seeking a combination of growth and income, offering stable and predictable income. Mortgage REITs, in contrast, may be more suitable for risk-tolerant investors focused on maximising income without a strong emphasis on capital appreciation.

REITs and tax liability

Real estate investment trusts (REITs) are a popular way for investors to gain exposure to the real estate market without directly owning properties. They are typically structured as corporations or limited liability companies and are required to distribute at least 90% of their taxable income to shareholders as dividends. In return, they are exempt from most corporate income taxes.

While REITs offer a steady income stream, their dividends come with unique tax consequences for investors. These payments may constitute ordinary income, capital gains, or a return of capital, each of which is taxed differently.

At the trust level, a REIT must pay 90% of its taxable income to shareholders to maintain its special tax status. This means that REITs generally do not pay corporate income taxes, although any retained earnings would be taxed at the corporate level.

For unitholders or shareholders, the dividend payments received can be classified as ordinary income, capital gains, or a return on capital. Ordinary income is taxed at the investor's marginal tax rate, while capital gains are taxed at 0%, 15%, or 20%, depending on the investor's income level. A return of capital is not taxed immediately but instead cuts the investor's cost basis in the REIT shares, potentially resulting in higher capital gains taxes when the shares are sold.

REITs offer several tax benefits, including the ability to deduct 20% of dividend income and preferential tax treatment under the Tax Cuts and Jobs Act (TCJA) of 2017. Additionally, non-US residents may benefit from tax treaties between the US and their country of residence, reducing withholding taxes.

It is important to note that the tax implications of REITs can be complex, and individual circumstances vary. Therefore, investors should consult with financial advisors or tax professionals to understand how REIT investments will impact their specific tax obligations.

Frequently asked questions