Surprise! Gold Crushed By REITs?

With Gold trading at record highs, I thought it would be interesting to take a step back and review the performance of three different asset classes dominating the news this year: Gold, Stocks and Real Estate. I used the following respective ETF proxies: GLD, SPY and VNQ (the largest REIT ETF at approximately $5.6bil in AUM). What I found took me a bit off guard! Check out the chart…

While the GLD and SPY line graphs are somewhat predictable in their differences, what really took me off guard is the run that the REIT sector has produced. I guarantee most Americans, probably even a majority of investment professionals, would not be able to even get close to the answer to the question, “What has real estate (REITs) returned year to date?” The answer of course is about 20% — crushing Gold and obliterating the S&P 500. Yet REITs appear to be flying under the radar. A quick examination of inflows shows that Long REIT ETFs have only taken in about $420mil of inflows thru August (Btw Gold has taken in over $6 bil thru August of 2010) this year versus the yearly total of $2bil in 2009 and $2.4bil in 2010. (Source: NSX data) That means 2008 and 2009 had about a $180mil per month average inflow rate into REIT ETFs versus 2010 inflow rate of about $50mil a month. (less than 30% inflow rate?) Why has the inflow pace this year dramatically slowed in a year with 20% performance — 1800 bps above the S&P 500 no less? Don’t REITs dish out the attractive income investors covet? A quick review of VNQ shows that the distribution yield is a relatively robust 3.65%. (Source: Yahoo Finance) Perhaps REITs haven’t fully recovered from the March of 2009 lows versus Equities. That’s by far not the case! See chart below…

REITs have exploded off of the March lows too. Why all this outperformance, but at the same time cooling inflows? Well, we have to go back to the Fall of 2008 — and run the chart to see the pain REIT holders experienced in about a six month time frame. Check out the chart below which illustrates the plunge REITs took leading up to the March 2009 lows.

Ouch, perhaps only traditional financial stocks fared worse during this time period and that’s why, despite the strong performance by REITs since the March 2009 lows, inflows are not matching performance in 2010. This seems to be a classic case of worst to first — a contrarian case study. The leftover emotional baggage of the 60% plus decline in REITs from 2008 — 2009, coupled with financing fears and “real estate” fatigue, has likely kept investors at bay.

So despite record highs for Gold, REITs have crushed Gold this year and since the March 0f 2009 market lows. Will REIT inflows respond?