"We house our families in our homes, and we house our economy in commercial real estate,” says Michael Grupe, head of research at the National Association of Real Estate Investment Trusts (Nareit). “As the economy grows, the demand for commercial real estate space typically increases.” And that applies to ETFs that track publicly traded REITs, since real estate ETFs move in line with the broader economy and their peaks and troughs follow the business cycle.

As such, REIT ETFs enjoyed a strong start to 2012, but recent weeks have seen that performance deteriorate as the market declined. This has been worsened by the variety of economic factors that impact real estate ETFs, with office, industrial, retail and residential property often bound-up in a single product.

The FTSE Nareit All REITs Index, which includes all types of commercial properties, had a 2012 year-to-date total return (including dividends) of 9.02 percent on May 31, while the 50 more frequently traded REITs tracked by the FTSE Nareit Real Estate 50 Index had a total return of 8.54 percent. The iShares ETF FTSE Nareit Real Estate 50 Index Fund (NYSE: FTY) holding those same 50 REITs returned 8.31 percent for that period.

“The year started off very well but REIT ETFs have all soured over the past month,” says Stijn Van Nieuwerburgh, professor of finance at NYU Stern and director for Stern’s Center for Real Estate Finance Research. “Markets have perceived a higher probability of a macroeconomic slowdown.”

In the short term, REIT ETFs have experienced the same volatility as most stocks since they are affected by the daily information flow into the markets. “Over the long term, a lot of that noise tends to wash out,” says Grupe. “Individual sectors will tend to reflect the economic fundamentals that drive that performance.”

Overall, REIT performance is heavily dependent on continued job growth. “The REITS have had such a strong rally in stock prices over the past three years, but they’re getting fully priced without a lot of job growth,” says Royal Shepard, REITs analyst at S&P Capital IQ.

A majority of REITs hold commercial real estate used for industrial, office, retail or residential purposes. What happens in the economy and changes in employment, manufacturing or consumer spending, for example, can have a direct effect on REIT performance.