One significant change was the addition of REITs to the S&P 500 in late 2001. (Today real estate makes up about 2% of the index.) This change has had a significant impact on the correlation between REITs and the S&P 500, one of the most widely used measures of overall stock market performance. With REITs added to the index, the S&P 500 has become more sensitive to their performance. In addition, as index funds have increased in popularity, more money has flown into REITs, as well, helping to increase this correlation.
The increased correlation between REITs and stocks was borne out in painful fashion during the 2008 market crash, when real estate funds lost 39.6%, compared with a 37% drop in the S&P 500.
It also should be noted that REITs are not the low-volatility asset class some think. Depending on the time period under review, real estate can have a standard deviation (a measure of volatility) greater than that of the S&P 500 index.
Asset Class Still Has Value in a Portfolio >>