Money Market Funds vs REITs
A money market fund holds very short-term debt, so its yield rises almost immediately when short rates rise while its capital value barely moves. A REIT owns property bought with borrowed money, so rising rates increase its costs and reduce what its buildings are worth.
These are both bought for income and they sit at opposite ends of the risk range. What makes the pairing worth writing about is that they are driven by the same variable — interest rates — and driven in opposite directions by it.
What each one is
A money market fund holds very short-term debt and aims to keep its value steady, paying whatever short rates provide. Money market funds covers it.
A REIT owns income-producing property, usually bought with substantial borrowing, and must distribute most of its rental income. REITs covers the structure, and ETF investing covers the wrapper both are usually held in.
One has almost no capital risk and the other has a great deal. Whereas the money market fund’s job is to still be worth what you put in, a REIT’s value moves with property valuations and with the cost of the debt behind them.
Where they differ
How rising rates land. A money market fund’s holdings mature constantly and are replaced at the new rate, so its yield rises within weeks and its capital is unaffected. A REIT’s borrowing gets more expensive and the valuation placed on its buildings falls, so the same event hits it twice.
Whether they compete. They do, directly. When cash pays a meaningful yield with no capital risk, a property fund must offer considerably more to justify the risk — which is part of why REIT prices fall when short rates rise rather than merely because of the debt.
What the income is. Interest paid by borrowers in one case; rent paid by tenants in the other. Both are external cash flows, which distinguishes both from products whose yield is manufactured out of the holder’s own upside.
How long you should hold each. A money market fund is a waiting room — over long periods short rates rarely beat inflation by much. A REIT is a decade-scale holding whose income can grow with rents.
Where they agree
Both distribute rather than accumulate, which is why both are usually better inside a tax wrapper.
Both are driven by interest rates, which is unusual — most pairs on this site respond to different variables entirely.
Both carry an ongoing charge that compounds over thirty years, where 20 basis points costs 5.8% of a pot and 75 costs 20.2%. On a low-yielding cash fund that charge is proportionally far more damaging.
And both are pooled products bought through an ordinary account with published holdings.
Which one to use: Money Market Funds or REITs?
Use a money market fund when the money has a near date. In the S&P 500 since 1950, 93% of trading days closed below the previous record with the longest wait for a new record at 7.5 years, from 1973 to 1980 — that is the environment a REIT lives in, and it is the wrong place for money needed soon.
Use a REIT when the horizon is long and you want property income specifically. Rents can rise over time in a way a cash yield cannot, and that growth is the reason to accept the capital risk.
Use the money market fund when short rates are high and you are unsure. Being paid to wait is a real option, and it is only available when rates are meaningful.
And size the REIT as a sector position rather than as an asset class, because that is what it is.
Why the shared driver matters
Because it means they rarely look attractive at the same time. A period of rising rates makes cash more appealing and property less, and a period of falling rates does the reverse — so a portfolio holding both is not diversified across this particular risk, it is hedged against it.
And because the REIT’s bad period is long. Rate cycles run for years, so the underperformance is not a quarter’s disappointment — it is a multi-year stretch during which the cash fund quietly pays more.
The original data
REITs appear in 10 videos at a median of 122,559 views across 9 channels. Mutual funds as a category appear in 38 titles at a median of 170,093 views.
10 videos on REITs, and a median above a hundred and twenty thousand. Property income draws one of the largest audiences per video measured on this site while the product that competes with it directly is left out of the titles — so the comparison people would benefit from most is the one nobody is making.
The question: Short rates just rose sharply. What happens to each?
One yield rises within weeks and the other’s capital falls. Same event, opposite consequences, which is the whole reason to understand them together.
When it fails
The characteristic failure is buying a REIT for its yield during a period of rising rates. The yield looks increasingly attractive precisely because the price is falling, and the price is falling for reasons that have not finished — financing costs are still rising, valuations are still adjusting, and cash is becoming a better competitor throughout. Someone screening on yield sees the number improve and reads it as an opportunity, when it is a market repricing a leveraged asset against a rising cost of money. The distribution keeps arriving the whole time, which makes the position feel like it is working.
A second failure is holding a money market fund for years, where short rates rarely beat inflation and the erosion never shows as a loss.
A third is treating a REIT as an asset class, which invites a position size nobody would give a single industry.
A fourth is holding heavy distributions outside a wrapper, where they can be taxed worse than gains.
And a fifth is ignoring a cash fund’s ongoing charge, which is proportionally largest exactly when the yield is smallest.
Related
Money market funds covers short-term debt and yield. REITs covers property income, borrowing and rate sensitivity. And ETF investing covers the pooled wrapper both use.
The connection people miss is that these two compete directly. When cash pays a decent yield with no capital risk, a property fund has to offer considerably more to be worth holding — so the same rate move that raises one product’s appeal lowers the other’s twice over.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.