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Instead of RQI, Consider these High Yielders for Real Estate Passive Income

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The Cohen & Steers Quality Income Realty Fund (RQI) is a high yield REIT fund that has outperformed the REIT sector over a long period of time. However, the author believes that this track record is misleading investors and that RQI is bound to lead to disappointing results for most shareholders. This is due to RQI’s use of leverage, which amplifies volatility and negates diversification benefits. Additionally, research has shown that most retail investors underperform the broader market due to emotional reactions to market crashes. The author suggests alternative high yielding real estate picks that may deliver more satisfactory results.

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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:

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Data by YCharts

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The Cohen & Steers Quality Income Realty Fund (NYSE:RQI) is a high yield REIT fund that has gained a lot of popularity due to its track record of outperforming the REIT sector (VNQ) over a long period of time. However, As highlighted by an article published on Seeking Alpha, this track record might be misleading investors and setting them up for long-term disappointment.

The article argues that RQI is bound to lead to disappointing results for most, if not all, shareholders. One reason for this is that RQI’s long-term track record is not nearly as good as it looks in the chart that shows its outperformance of the REIT sector. The periods where REITs got pummeled show that RQI significantly underperformed VNQ each time. The reason for this is that RQI, as a closed-end fund, uses quite a bit of leverage. As a result, when REIT prices go up, RQI generally outperforms the broader REIT sector, and when REIT prices fall, it generally underperforms the broader REIT sector.

The amplifying effect of leverage is further enhanced by the fact that closed-end funds 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.

The article concludes by offering some alternative high-yielding real estate picks that will likely deliver more satisfactory results than RQI. The author suggests looking for high-yielding REITs with strong fundamentals, such as Realty Income (O), National Retail Properties (NNN), and W.P. Carey (WPC).

In summary, while RQI might seem like an attractive high-yield REIT fund, investors should be aware of its potential downsides. The fund’s use of leverage and its volatility make it a risky investment, and most retail investors tend to underperform the market due to their emotions. As an alternative, investors might consider looking for high-yielding REITs with strong fundamentals.

NewsReal Estate NewsInstead of RQI, Consider these High Yielders for Real Estate Passive Income

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