Solution: REITs can also provide diversification benefits when included in a portfolio of traditional investments, such as stocks and bonds.
REIT is like stock traded on exchange. Does it provide diversification benefits with traditional investments?
With bonds - Yes
With equity - not really as both have a lot of overlapping factors that drive them such as inflation, publicly traded on an index. They’d have a high correl with equities.
If majority of your folio is invested in debt, adding REITs would definitely add diversification benefits.
But does mortgage REIT have high correlation with bonds?
They’d have higher correl with bonds as compared to normal REITs. The reason for this is that they earn interest income from the mortgages they hold by lending out to other real estate guys. Also, this would still have some correl with equity as it trades like equity on an index.