The Cohen & Steers Quality Income Realty Fund (RQI) is a popular high-yield REIT fund that has outperformed the REIT sector (VNQ) over a long period of time. However, this track record is misleading as RQI significantly underperformed VNQ during periods where REITs were pummeled, due to RQI’s use of leverage as a closed-end fund. This amplifies the effect of leverage and makes RQI a volatile instrument, negating the diversification benefits of holding a large fund like RQI or VNQ for REIT exposure. Retail investors tend to underperform the market due to emotional reactions during market crashes, so investing in leveraged and volatile products like RQI may lead to long-term underperformance. Alternative high-yielding real estate picks are suggested for more satisfactory results.
The Cohen & Steers Quality Income Realty Fund (NYSE:RQI) is a wildly popular high yield REIT fund. Much of its legend stems from its track record of outperforming the REIT sector (VNQ) over a long-period of time:
Data by YCharts
However, we believe that this track record is misleading investors, setting them up for long-term disappointment by investing in RQI. In this article, we discuss why RQI is bound to lead to disappointing results for most if not all shareholders and then offer some alternative high yielding real estate picks that will likely deliver more satisfactory results.
Why RQI Is Poised To Disappoint
One reason why we think that RQI is bound to disappoint investors over the long-term is simply because its long-term track record is not nearly as good as it looks in the chart we just shared with you. First of all, if you look at the periods where REITs got pummeled, you will notice that RQI significantly underperformed VNQ each time. The reason for this is simple: RQI – as a closed end fund – uses quite a bit of leverage. As a result, when REIT prices go up, it generally outperforms the broader REIT sector. When REIT prices fall, it generally underperforms the broader REIT sector.
The amplifying effect of leverage is further enhanced by the fact that CEFs are free to trade at deep discounts and large premiums to their underlying NAV. As a result, when REITs are in favor, RQI’s share price generally trades at a higher ratio relative to its NAV, whereas when REITs are out of favor, RQI’s share price generally trades at a wider discount to its NAV. Ultimately, this means that RQI is a pretty volatile instrument, negating much of the supposed diversification benefits that come from holding a large fund like RQI or VNQ for REIT exposure.
Moreover, research has shown that most retail investors tend to vastly underperform the broader market for one simple reason: they become victims of their emotions and tend to sell during volatile market crashes, thereby locking in steep losses and oftentimes missing out on some of the strongest upward moving days that the market experiences. As a result, by investing in leveraged, volatile products like RQI, chances are you are setting yourself up for long-term underperformance. In other words: retail investor beware, buy RQI at your own risk and make certain that you can continue to hold it even during violent market crashes while it is underperforming the broader REIT sector.
Another reason why…
If you’re looking for high-yield real estate picks that are likely to deliver satisfactory results, we suggest you forget about RQI and consider some of the following alternatives:
To put a stop to, we believe that RQI is a risky investment that is likely to disappoint investors over the long-term. Instead, investors seeking high-yield real estate investments should consider some of the alternatives we have presented in this article.