Bond Alternatives

For the most part, people add bonds into their portfolios for two main reasons: portfolio price stability and some form of income twice a year until maturity. If you’ve been following market trends over the past couple of months, you’ve probably come across such headlines: Bond yields are rising. And yes, bond yields have indeed risen over the last several months. But does it make sense to try and get into bonds in the current bond environment? First, if you get in right now, you’ll have a lot of ground to make up before yields get anywhere close to attractive. Second, although the 10-year Treasury yield has doubled over the past year, the yields still stand at less than 2%– such low yields can’t even keep up with inflation. And with interest rates currently low, right now presents the perfect opportunity for some people to seek out bond alternatives.

What is a REIT (Real Estate Investment Trust)?

A Real Estate Investment Trust (REIT) is a professionally managed trust that holds real estate assets and allows individuals to invest in large-scale, income-producing real estate. REITs are one of the oldest and best-known bond alternatives. What happens is that a REIT firm typically owns and operates income-producing real estate such as shopping malls, office buildings, apartments, resorts, self-storage facilities, warehouses, and mortgages. Despite comparable similarities to real estate companies, REITs do not acquire real estate properties for resell. They instead buy and develop properties to operate them as part of their wider portfolio. The one thing that makes REITs so lucrative is the fact that 90% of the profits go back to investors. However, just like all investment avenues, care should be taken before settling on REITs as an investment option. 

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