Adding real estate investment trusts (REITs) to a broad selection of diversified portfolios boosted compound annual total returns by 50 to 60 basis points annually versus non-REIT portfolios, reports a recent survey by Ibbotson Associates. The study examined REIT and non-REIT portfolio performance between 1998 and 2004. Ibbotson is a leading authority on asset allocation.

“In all cases, REITs were included in the most effective portfolios of highest returns and lowest risk, suggesting that these other asset classes are not effective substitutes for the diversification power that REIT stocks can provide,” says Michael Grupe, senior vice president for research and investment affairs at industry group NAREIT, which commissioned Ibbotson to conduct the study.

Adds Grupe: “In particular, Ibbotson documented low to moderate correlation of returns from REITs and small-cap stocks, suggesting that small caps are not substitutes for the diversification benefits of REITs.”