Can REITs Continue to Rally in 2011?

After trouncing the S&P 500 two years in a row, REITs may still have room to run in 2011.

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While jumping on the REIT bandwagon in 2011 might not be as lucrative as it was in 2009 or even 2010, experts say REITs still have a place in investors' portfolios. "They haven't lost their benefit as a slot in an asset allocation for a portfolio," says Gogerty. Mutual funds and ETFs that invest in REITs offer instant diversification and professional management, he says, which are huge benefits for retail investors looking to avoid the hefty fees that generally come with investing directly in REITs. "To build a diversified portfolio there would be significant transaction costs," Gogerty says. "For commercial real estate exposure, just the diversification and professional management benefits still tilts in favor of ETFs and mutual funds."

For passive, index-like exposure to REITs, Gogerty likes the Vanguard REIT Index Fund (symbol VGSIX), which tracks the MSCI U.S. REIT Index and gives investors exposure to all major commercial property types. Vanguard offers an ETF that tracks the same index, Vanguard REIT Index ETF (VNQ), which is "the lowest-priced fund for broad exposure to publicly traded real estate investment trusts," according to Morningstar analyst Patricia Oey. In the mutual fund world, Gogerty says T. Rowe Price Real Estate (TRREX) capitalizes on the long and successful history of the fund's skipper, David Lee. "That experience is crucial in a niche space," he says.

Still, Gogerty reminds investors to exercise caution with their REIT investments. "Yields have continued to be compressed over the past two years and people are really flocking to yield right now. They're looking to get it any way they can," he says. "People are really bidding up those prices and the cash flow growth hasn't really kept pace thus far. That's something you need to be cautious of."