Real estate fund investors build house of rising returns

— -- You've been mocked. You've been humiliated. You've been insulted.

If it's any comfort, lots of other people are trying to sell their homes, too.

But real estate mutual funds are faring surprisingly well in the worst real estate market in decades. One reason: Real estate funds invest in commercial properties, which march to a different drummer than the residential market. Will the commercial real estate rally continue? Probably — but it wouldn't hurt to move in slowly.

Real estate funds invest primarily in real estate investment trusts, or REITs — which, in turn, invest in apartments, offices, storage facilities and other commercial real estate. Real estate funds have gained an average 6% this year, vs. a 5.3% loss for the Standard & Poor's 500-stock index with dividends reinvested.

REITs have high dividend yields, which make them popular in uncertain markets — like, say, this one. The average REIT yields 5.17%, according to the National Association of Real Estate Investment Trusts, a trade organization. In contrast, 10-year Treasury notes yield 4.04%, and the S&P 500 yields just 2.01%.

Dividends help cushion your portfolio in market downturns. And REITs, by nature, are dividend machines. REITs must pay out at least 90% of their taxable income to investors through dividends.

Inflation fears help REITs, too. The consumer price index, the government's main gauge of inflation, has gained 3.9% for the 12 months through April. Food and energy prices have soared far more, raising fears of a burst of persistent inflation.

People tend to buy real estate, gold and other tangible assets when the value of paper money declines. "In the long term, physical property has offered a hedge against inflation," says Joe Rodriguez, lead manager of the AIM Global Real Estate fund.

Finally, REITs are also doing well because Wall Street hit them with a wrecking ball last year. The average REIT fund fell 14.7% in 2007, according to Morningstar, the mutual fund tracker. "The REITs' elastic band got stretched so far in one direction last year that there was nowhere to go but up," says Alec Young, strategist for S&P.