The Cohen & Steers Quality Income Realty Fund (RQI) is a popular high-yield REIT fund that has outperformed the REIT sector over a long period of time. However, this track record is misleading as RQI significantly underperforms when REITs fall due to its use of leverage. Additionally, RQI is a volatile instrument that negates diversification benefits and may lead to long-term underperformance for retail investors who tend to sell during market crashes. Therefore, investors should beware and consider alternative high-yielding real estate picks that are less volatile and offer more satisfactory results.
Investors seeking high yield real estate investment trusts (REITs) often turn to the Cohen & Steers Quality Income Realty Fund (NYSE:RQI). The fund has gained popularity due to its long-term track record of outperforming the broader REIT sector (VNQ). However, this track record may be misleading, and investors may be setting themselves up for long-term disappointment by investing in RQI.
One reason why RQI may disappoint investors is due to its use of leverage. As a closed-end fund (CEF), RQI uses leverage to amplify returns. When REIT prices rise, RQI generally outperforms VNQ. However, when REIT prices fall, RQI generally underperforms VNQ. This amplifying effect of leverage is further enhanced by the fact that CEFs can trade at deep discounts or large premiums to their underlying net asset value (NAV). When REITs are in favor, RQI’s share price generally trades at a higher ratio relative to its NAV. Conversely, when REITs are out of favor, RQI’s share price generally trades at a wider discount to its NAV. This volatility can negate much of the supposed diversification benefits that come from holding a large fund like RQI or VNQ for REIT exposure.
Research has shown that most retail investors tend to underperform the broader market due to emotional reactions during volatile market crashes. By investing in leveraged, volatile products like RQI, investors may be setting themselves up for long-term underperformance. Therefore, retail investors should be aware and buy RQI at their own risk, making certain that they can continue to hold it even during violent market crashes while it is underperforming the broader REIT sector.
Instead of RQI, investors may consider alternative high yield real estate picks that are less volatile and less leveraged. One option is the Vanguard Real Estate ETF (VNQ), which is the largest REIT ETF and offers exposure to a broad range of real estate sectors. VNQ has a lower expense ratio than RQI and does not use leverage. Another option is the Global X SuperDividend REIT ETF (SRET), which offers exposure to a diversified portfolio of high yield REITs with a focus on dividend income. SRET has a higher yield than RQI and also does not use leverage.
To cap it all off, investors seeking high yield REITs should be cautious when considering RQI. Its long-term track record may be misleading, and the use of leverage can result in higher volatility and underperformance during market crashes. Alternative high yield real estate picks, such as VNQ or SRET, may offer less volatility and less leverage, making them potentially more suitable for long-term investors seeking high yield REIT exposure.