CHICAGO In the wake of a dramatic gold sell-off over the last two weeks, investors are looking for other ways to hedge against inflation.
They are realizing that the metal is a false prophet of the hyperinflation that gold bugs have been expecting since 2008. It's clear at this point that the scenario probably won't materialize in the immediate future. Assets of the SPDR Gold Trust, the leading gold bullion exchange-traded fund, have dipped to the lowest level since 2010 on a wave of redemptions.
Gold, which on Monday traded $100 over a two-year low of $1,321 on April 16, is also proving not to be a safe haven from global economic woes. The metal was supposed to be a defensive shadow currency in a world going to hell, but it turns out to be highly volatile as well.
The latest massive gold selling was initially ignited by the prospect of slowing Chinese and American economies, fears about the euro and dollar, and banking turmoil in Cyprus.
Investors looking for inflation protection, income and appreciation should instead consider real estate investment trusts (REITs) as worthy alternatives. The lion's share of nervous investor attention has been focused on gold, and few see REITs as a perennial retirement fund holding or inflation-fighter.
REITs, which invest in mortgages and properties from shopping malls to office buildings to multi-family units, are also hedges against inflation because property owners can raise rents when the economy heats up. They are a superior investment to gold because they also offer income and benefit from an improving real estate market.
If you've allocated 5 percent or more to gold, consider shifting it to REITs. If you already own REITs and gold, you should consider increasing your REIT holdings and reducing your gold stake, although REITs should make up no more than 10 percent to 15 percent of your total portfolio.
Here are some reasons why REITs' robust performance may continue:
* Unlike gold bullion, which doesn't pay a dividend and derives its value from collective fear of currency and economic declines, REITs pay generous dividends based on property rents and mortgages. Last year, equity REITs yielded 3.5 percent on average, which is more than three times what you could find in a savings instrument.
* As publicly traded companies that own real estate and mortgage portfolios, REITs make sense for income-oriented investors seeking capital appreciation. By law, they must pay out at least 90 percent of taxable income to shareholders in the form of dividends, so they offer robust yields.
* Supplies of housing are still tight, so REITs invest conservatively and don't overbuild the way residential builders have done during bubble years. An expanding economy keeps demand high; the supply of buildings is still in catch-up mode.
* Financing costs for mortgages will remain low at least in the short term. Unless the Federal Reserve changes its policy, the central bank will keep interest rates near zero until 2014. This is always positive for commercial real estate, which lowers acquisition and financing costs.
* Industries need more space. The rising tide of economic growth allows manufacturers and light industry to expand, so they rent more space. Industrial REITs were among the best performers last year, up more than 31 percent.
THE PROOF IN NUMBERS
Performance has been steady: The REITs sector beat the S&P 500 index last year, returning 20 percent, compared with the S&P's 16 percent gain (with dividends invested), according to REIT.com, the website for the National Association of Real Estate Investment Trusts (NAREIT).
In the first quarter, the FTSE All-REIT Index returned 9 percent, compared with 10.6 percent for the S&P 500, and a negative 5 percent for the SPDR Gold Trust.
The best way to own REITs is through indexed exchange-traded funds like the Vanguard REIT ETF or the Schwab U.S. REIT ETF. Both funds own a broad array of REITs that hold retail, office, storage, industrial and residential properties. I hold the Vanguard fund in my 401(k).
The Vanguard fund gained nearly 18 percent last year and is up 13 percent year to date through April 19. The Schwab fund rose 17 percent last year and is up 12 percent since the beginning of the year.
Ideally, any REIT fund you choose should be diversified across sectors and regions. The Vanguard fund is favored by Neena Mishra, director of ETF Research for Zacks Investment Research in Chicago, for its "diversification, low cost and liquidity." The fund holds REITs that invest in residential, commercial, office, storage and healthcare properties.
Wild cards that could slow REIT returns are rising interest rates or a prolonged economic slowdown. Yet if you're looking for income accompanied by appreciation in a slow-growth environment, REITs as a small percentage of your portfolio are a good choice to offset the sagging returns of other income investments.
(The author is a Reuters columnist and the opinions expressed are his own.)
(Follow us @ReutersMoney or here Editing by Beth Pinsker and Steve Orlofsky)