Small Cap REITs vs Large Cap REITs

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While large cap REITs may be the solution for some, there are many opportunities amid small cap REITs

Robert Dekanski | March 14, 2019 | SmallCapPower: Real Estate Investment Trusts (REITs) are an excellent way to add both income and potential growth to a financial portfolio. However — counter to what some may consider “common sense” — large cap investments may not always be the most financially profitable in the long run. While large cap may be the solution for some, there are many opportunities amid small cap REITs. In the words of James Milam (Sandler O’Neill and Partners), “current market cap is not a primary determinant of future value creation” — but why might this be the case?

Both large cap and small cap REITs are companies that either own or finance income producing real estate property of some type across a variety of markets. Many of these entities trade publicly on major stock exchanges while others are not publicly traded. REITs have a number of benefits for investors such as:

  • The ability to invest in real estate assets without having to buy, manage or finance property.
  • The option to purchase individual company stock, exchange traded funds (EFTs) or mutual funds.
  • Earning a share of any income resulting from the real estate investment.
  • Competitive market performance with complete transparency by parent companies.
  • Diversifying financial portfolios.

It’s important to keep in mind that the specifics of each REITs benefits and protocol will depend on the type of investment chosen.

Large cap investments are typically considered less risky and volatile than small and mid cap stocks. While large and mega cap stocks typically remain stable in recessions, they often get outperformed by small stocks during economic upswings. These real estate investment trust companies have market caps of less than $2 billion, and there are also micro caps with even smaller caps to consider. A good portion of small cap REITs are newcomers that have significant growth potential, even though they are generally regarded as more volatile and riskier in the short term than large cap investments. However, small caps tend to outperform large caps during the emergence from a recession.

A majority of investors opt to put money in large cap REITs to enjoy the security bigger trusts can provide while ignoring small cap options entirely. According to many experts, overlooking small cap REITs may be a bit short-sighted for a few reasons.

Small cap dividend yields are typically larger than the major players, which is likely due to capital being driven into large funds that are pushing down yields. Large cap REITs generally offer greater access to capital and liquidity for investors than many small caps do, however, as they often pay out in dividends or other methods that aren’t available for immediate liquidation.

It’s also good to keep in mind that today’s small cap REIT could evolve over time into the next industry giant — many of today’s biggest players would have been considered small to medium at their conception. Because it is not realistic to have the ability to predict when the marketplace will favor small, large or mid cap REITs, most investment professionals advise clients to diversify their portfolio with a variety of stock sizes. Before making a move, it’s recommended to speak to an investment advisor who can help evaluate your financial goals and guide you to smart choices.

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