iSectors quantitative work shows that although they have some correlation to both the equity and fixed income markets, REITs provide enough diversification that they should be considered for all retirement portfolios–even those that are not income oriented yet.
This makes sense since commercial real estate is a large part of the economy and is not well represented in other equity sectors, and why the major indices will separate REITs from financials next year.
For income oriented portfolios, we recommend including REITs in alternatives portfolios with MLPs, TIPS and BDCs. In more growth portfolios, the alternatives portfolio can include pre-IPO equities, hedged strategies and commodity funds.
iSectors also advocates the use of a tactical asset allocation fund that utilizes REITs as one of the potential sectors for investment. This gives the portfolio manager a diversifying sector that at times out-performs on a risk-adjusted basis.