Outside the Box REIT ETFs (IYR, KBWY, IFEU, PSR)

Rising interest rates have an affect on all asset classes throughout the market, however the magnitude will vary dramatically.

Sectors that generally distribute above-average income via dividends will be hurt more during a rising interest rate environment.

The U.S. real estate investment trust (REIT) sector has long been an area for investors to both gain access to the property market as well as regular income. After a strong start to the year the sector has been struggling and is now greatly lagging the S&P 500.

The heavily traded iShares Dow Jones U.S. Real Estate Index ETF IYR is only up two percent this year and is 13 percent below the 2013 high. The return does not include the quarterly dividend that currently stands at a yield of 3.93 percent.

REIT ETFs Outperforming

Not all REIT ETFs are created equal based on where they invest their money and in what types of properties. For example, the PowerShares KBW Premium Yield Equity REIT ETF KBWY is up 10.7 percent in 2013 and it offers a yield of 5.1 percent. The ETF focuses on approximately 24 to 40 small-cap and mid-cap REITs that are weighted to the holdings with the highest dividend yield. The focus on the smaller REITs combined with higher dividends has been a factor in why KBWY has been able to outperform.

Another outperformer is the iShares Europe Developed Real Estate ETF IFEU, which is up 10.4 percent this year. The ETF recently hit a multi-year high before pulling back to begin the month of November. The ETF concentrates solely on European companies with the U.K. and France making up 65 percent of the allocation. The current dividend yield is 3.0 percent.

The PowerShares Active U.S. Real Estate ETF PSR is an actively managed ETF that bases it portfolio on statistical and quantitative metrics. Year-to-date the ETF is up 5.6 percent and it pays a 2.7 percent dividend yield. The portfolio is rebalanced every month to meet the proprietary criteria. The expense ratio is higher than most of its peers at 0.80 percent.

Investors looking to continue to have exposure to the REIT sector should think outside the box and veer from the typical REIT ETF. Whether it be small-cap stocks or international or an actively traded ETF, it appears the opportunities lie in the niche and often overlooked REIT ETFs.