Can Real Estate ETFs Stand A Rate Hike?

R eal estate ETFs amassed impressive returns in the past few years. But this year has been different. Most funds are down in 2015 and underperforming the market. So what's in store for investors going forward?

"In recent years, it's been an ideal recovery for REITs .. . a perfect positive storm," said Morningstar analyst Robert Goldsborough. "You've had low rates, but you've also had a very slow and steady growth in the economy."

The largest REIT ETF, $46.98 billionVanguard REIT ETF ( 

VNQ

 ), yields 4.1% and returned from 2% to 30% from 2009 to 2014. But it's down 7% so far this year. The lowest-costSchwab U.S. REIT ETF ( 

SCHH

 ) yields 2.41% and returned about 17%, 1% and 32% in each of the past three years, respectively. It's down 4% year to date. The S&P 500 is off 2%.

In prior years, incremental demand helped push occupancy as well as rental rates higher, driving up REITs' operating income, explains Goldsborough. Low rates also made the higher REIT yields more appealing to investors. As a result, real estate funds saw massive inflow of investor money.

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