REIT Funds Rush Ahead

As long as the Fed's move up is orderly, fund managers say, the run-up in REITs won't be doomed by rising rates. In fact, most real estate fund managers would welcome higher rates, provided they are a function of an expanding economy that will allow landlords to raise rents. Higher lending costs also makes renting preferable to home-buying for many people, thus increasing the value of rental properties owned by REITs.

For its part, the ICF is a fairly concentrated 38-stock REIT portfolio whose top five stocks include Equity Office Properties Trust(EOP), Simon Property Group(SPG), Vornado Realty Trust(VNO), Boston Properties (BXP) and Public Storage (PSA).

Real estate fund investors anxious over potentially higher rates also need to remember that any move upward is starting from an abnormally low level, says Mike Torres, portfolio manager for the $34 million (LLUKX)Adelante U.S. Real Estate Securities fund.

"We've had such a dramatic decline in rates that the Fed is just slowly taking excess liquidity off the table," says Torres.

Investors should also consider that interest rates are still well below where they were last year at this time, even after the recent jump up on the April jobs report.

"People got scared early in the year that interest rates were going to start rising and they took profits," says Lieber. "But when it became obvious that rates were not going to sprint away, people came back for the yield and the improving fundamentals."

To watch Gregg's video take on the REIT phenomena, click here.

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