An interesting dynamic is playing out in the REITs sector.

The XLRE real estate sector ETF has managed to largely keep pace with the broader market this year even with rates on the rise, bucking the conventional wisdom that the group will come under pressure. The XLRE ETF is up more than 2% in 2021, while the S&P 500 has increased 4%.

Some real estate investment trust ETFs have performed even better – the VNQ Vanguard real estate ETF, for example, is up 4% in 2021.

“Typically higher interest rates are a headwind for REITs as folks can get more reliable income elsewhere. But interestingly enough prior to [Monday], REITs were actually beating the S&P. We’ve had more than a $1.5 billion come into real estate ETFs so far this year,” Michael Arone, chief investment strategist at State Street Global Advisors, told CNBC’s “ETF Edge” on Monday.

Arone says two factors are driving those gains – the first is the reopening trade. Expectations that consumers will return to the malls and workers back to the office this year are high.

“The second thing is inflation so values of rental property rents and the value of real estate increases as prices increase, and this provides reliable income above inflation, right now more than double both the S&P dividend yield and 10-year Treasury yields.”

The XLRE ETF, which holds stocks such as American Tower and Crown Castle, was higher Monday.

Disclosure: Arone manages the XLRE SPDR ETF.

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