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REITs are sometimes described as "just small-cap value stocks," but that's not accurate: listed equity REITs give investors a way to access a different asset class--income-producing real estate--through the stock market. Diversification is about investing in different asset classes, not different segments of the same asset class.
These two slides highlight the difference between gaining diversification into different asset classes and gaining exposure (but not diversification) to different styles in the stock market. As the first slide shows, listed equity REITs have historically been more similar to small-cap value stocks than to any other segment of the stock market, with an average correlation of 0.72 (based on monthly total returns) from January 1991 through July 2017. That's what gave rise to the inaccurate shorthand. As the second slide shows, though, small-cap value stocks have been more similar to small-cap GROWTH stocks (0.84) than to listed equity REITs; they've also been more similar to LARGE-CAP value stocks (0.83) than to listed equity REITs.
Listed equity REITs have historically provided asset-class diversification even though they're accessed through the stock market. Styles (value/growth, large/small, etc.) were never developed for the purpose of diversification, and they have provided comparatively little of the potential benefits of diversification.
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