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Real-estate investment trusts, often thought of primarily as a way to diversify a portfolio, are playing a starring role this year.

The FTSE Nareit All REITs index—the broadest US REIT index, with a market capitalization of $1.4 trillion—had total a total return, including dividends, of 26.05% this year as of July 31, versus 17.99% for the S&P 500 index.

REITs have benefited from inflation concerns, says Todd Rosenbluth, head of ETF and mutual-fund research at CFRA. Real estate is often considered a hedge against inflation.

Low yields in the bond market are also fueling interest in REITs, Mr. Rosenbluth says. REITs are required to pay out 90% of taxable income to shareholders as dividends. The current average dividend yield for the FTSE Nareit All REITs index is 3%.

Finally, the outlook for residential and commercial real estate for the second half of 2021 as the economy continues to emerge from the pandemic also is supporting REITs, Mr. Rosenbluth says.

One way many investors have chosen to play the REIT market is through equity REIT exchange-traded funds like Vanguard Real Estate ETF (VNQ). The fund, which is the biggest in the sector, with $40 billion in assets, tracks the performance of the MSCI US Investable Market Real Estate 25/50 index. Through July 31 its total return was 26.77% this year and 35.42% over the past 12 months.

There are now 35 equity REIT ETFs that manage a total of about $87 billion in assets, according to CFRA. While most are passively managed like VNQ, a few companies—including Janus Henderson, Fidelity Investments, SS&C ALPS Advisors and Invesco—have launched actively managed REIT ETFs this year. “Asset managers will launch more actively managed REIT ETFs in the next 12 months, seeking to generate above-average returns through security selection and tapping into investors’ growing comfort with alternatives to index-based strategies," Mr. Rosenbluth says.

“We think it’s a space with a lot of opportunity for the active manager," says Greg Kuhl, portfolio manager of Janus Henderson US Real Estate ETF (JRE), a fund that launched in late June. “It’s not a crowded space in the ETF market, and we want to be an early mover."

Equity REIT ETFs reflect the diversity of the real-estate market, with different funds tracking indexes that focus on different sectors. Here are the five best-performing equity REIT ETFs this year, according to CFRA, through July 31:

• Nuveen Short-Term REIT ETF (NURE)

The fund has $62 million in assets and tracks the investment results of the Dow Jones U.S. Select Short-Term REIT Index, which comprises REITs in property sectors that typically have relatively short-term leases, such as apartment buildings, hotels, self-storage facilities and manufactured homes. Total returns, including dividends, are 35% this year and 62% over the past 12 months. Its dividend yield is 2.2%.

• iShares Residential & Multisector Real Estate ETF (REZ)

This $792 million fund invests nearly half its portfolio in residential REITs, nearly a third in healthcare REITs and about 20% in specialized REITs, which own a mix of properties that don’t fit into typical REIT sectors, such as movie theaters, casinos, student housing and cellular towers. Total returns are 34% this year and 50% for the past 12 months. Its dividend yield is 2.5%.

• Invesco S&P 500 Equal Weight Real Estate ETF (EWRE)

With $81 million in assets, the fund’s top holdings are in REITs specializing in healthcare, storage, communications infrastructure and apartment communities. Total returns are 33% this year and 38% in the past 12 months, with a 3% dividend yield.

• SPDR Dow Jones REIT ETF (RWR)

This fund, with $1.9 billion of assets, generally invests its total assets in the securities in the Dow Jones U.S. Select REIT Index, which include REITs and real-estate management and development companies. It has garnered total returns of 29% this year and 42% over the past 12 months, with a dividend yield of 3.1%.

• Real Estate Sector SPDR (XLRE)

This $3.9 billion fund generally invests 95% of its assets in securities in the Real Estate Select Sector Index, which tracks the real-estate sector of the S&P 500. Total returns are 29% this year and 32% for the past 12 months, with a 2.9% dividend yield.

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