After having a terrible 2013, real estate investment trusts (REITs) have been killing it this year. Commercial property and mortgages have surged in the face of continued low interest rates and as investors shun traditional fixed income products for higher yielding options. As such, REITs like the iShares Real Estate 50 (FTY) have benefited immensely. Better yet, with the economy improving and rates still low, there's no sign yet that the REIT resurgence will end anytime soon.

Still Great Gains

At the end of the Great Recession, commercial real estate was a great place for investors to park cash. That was until the Fed signaled that it would begin winding down of its quantitative easing and bond buying programs in 2013. Investors indiscriminately sold off higher-yielding equities expecting them to suffer. Predictably, REITs fell hard and finished 2013 in the red.

But the expected rate rise has yet to materialize, and as a result, REITs have come roaring back. Since the beginning of the year, the sector benchmark – the MSCI U.S. REIT Index – has returned over 16%. Equities have returned about 2% over that same period. Similar gains could be in store for the rest of the year.

The first reason are those pesky interest rates.

Despite the slowdown of the Fed’s bond-buying program, the rate on the 10-year Treasury note has stayed relatively stable and even fallen to a low recently. At the same time, Fed Chairwoman Janet Yellen has pledged to keep short-term and overnight lending rates in the basement until the economy shows further improvement. Those rates are more closely tied to what fixed income investors receive on CDs, savings accounts and the like. As rates continue to be low, investors have plowed some big bucks into real estate-based equities for their safety and better returns. Already, 2014’s inflows into REIT-focused funds have surpassed 2013’s total.

Secondly, a strengthening economy benefits owners of commercial real estate.

Both office rents and industrial property rental rates and vacancies are tied directly to improving economic conditions. As the U.S. economy has improved, industrial properties saw the biggest single-year decline in vacancies ever. At the same time, office rent rates have increased. Green Street Advisors estimates that by 2018 rent rates for prime/core office space will have increased by 25%. Meanwhile, recent rises in consumer confidence and spending will continue to boost mall, strip mall and power center owners, while the lodging sector continues to see rising RevPAR numbers as demand grows among business and leisure travelers.

Getting Some Real Estate Exposure

With low rates persisting and a strengthening economy at their backs, the high dividends and share price growth REITs offer should be one of the best total return elements of 2014. Investors still have time to cash in on the sector. The easiest way is through the $41 billion Vanguard REIT Index ETF (VNQ).

VNQ tracks the previously mentioned MSCI REIT Index. That gives investors exposure to 131 different real estate firms, including office REIT Boston Properties Inc. (BXP) and mall operator Simon Property Group Inc. (SPG). VNQ’s broad scope also helps the ETF in the yield department. Currently, the fund yields a Treasury-beating 3.87%. And Vanguard's commitment to low prices helps VNQ’s expense ratio stay low (VNQ carries a 0.10% fee). Another choice is the iShares Cohen & Steers REIT (ICF), which invests in large real estate companies.

For investors considering direct bets based on the strengthening economy, hotel owners are often the last sector to see a bump making current valuations quite juicy. A solid pick could be RLJ Lodging Trust (RLJ). The firm focuses on strong hotel brands, such as Marriott International Inc. (MAR), and recently sold off several underperforming hotels. Analysts expect RJL’s FFO growth to rise 14% this year and 13% next year. Its shares currently yield 3.2%. Meanwhile, Hospitality Properties Trust (HPT) offers a similar portfolio and a 6.8% yield.

Finally, for those investors looking to profit from the low interest rate environment, mortgage REITs (mREITS) may worthy of your buck. This REITs don’t actually own physical properties, but the loans tied to them. There are countless varieties of mREITS, each with their own risks. The Market Vectors Mortgage REIT Income ETF (MORT) tracks a basket of these high yielders, such as Invesco Mortgage Capital Inc. (IVR). MORT yields a monster 13%. (For more on this topic, see Mortgage REIT ETFs: 10% Yields + Low Volatility.)

The Bottom Line

After spending much of 2013 in the dumps, REITs have roared this year. Investors should expect the gains to continue as long as the economy strengthens and interest rates remain low. (For more on this topic, see 5 Types Of REITs And How To Invest In Them.)

Related Articles
  1. Retirement

    Investing In REITs Instead Of Property

    Learn why this one particular REIT is a better investment than holding physical property in your retirement portfolio.
  2. Mutual Funds & ETFs

    Complete Guide To Investment Companies, Funds And REITs

    Learn everything you need to know about mutual funds, ETFs, hedge funds, UITs and REITs.
  3. Chart Advisor

    REITs Coming Back To Life

    After a summer correction, some REITs have rebounded to all-time highs.
  4. Stock Analysis

    The 5 Best Alternatives to Zillow & Trulia

    Understand the online real estate industry and how Zillow and Trulia are industry leaders. Learn about alternatives to Zillow and Trulia.
  5. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  6. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  7. Investing Basics

    Pros & Cons of Investing in a Condo with Friends

    Buying a beach house or big-city pied-à-terre with friends can save money and make sense, but only if you set it up right. Here's how to avoid trouble. thoroughly research and discuss potential ...
  8. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  9. Investing

    Costs New Investors in Real Estate Do Not Consider

    As lucrative as real estate investment can be, there are a multitude of costs that new real estate investors must consider.
  10. Investing News

    How to Diversify with REITs

    REITs can be a quality addition to a portfolio for diversification. Here are several to add to your watch list.
  1. Can mutual funds invest in REITs?

    Mutual funds invest in stocks and fixed-income securities, as well as various real estate investment trusts (REITs) formed ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. How is market value determined in the real estate market?

    Anyone who has ever tried to purchase or sell a home has probably heard a lot about the property's fair market value, or ... Read Full Answer >>
  6. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!