NEW YORK (CNN/Money) - The real estate sector has been on fire. And it's not over yet.

The average Real Estate Investment Trust (REIT), a corporation that invests in property and mortgages, is up about 41 percent in the past two years. Funds that invest in real estate earned an average of 32.4 percent during the same period. This year, both REITs and funds are up around 6 percent through March 14.

Fund managers insist these stocks have life left in them -- and that real estate is a great way to protect your portfolio during volatile times.

"[Real estate] stocks are no longer cheap, but they're fairly valued," said Steve Buller, manager of Fidelity Real Estate Investment Fund. "Real estate is a great diversifying tool because it zigs when the market zags."

Most people think of single-family homes when they think of real estate. But that's a private market -- record new home sales can't help your bottom line.

Money managers play the sector by investing in commercial real estate instead, including apartment buildings, office buildings, strip malls, warehouses and hotels. They also invest in assisted-living facilities, nursing homes, even lumber companies.

REITs use the pooled capital of many investors to buy into income-producing property or mortgage loans. They offer steady returns and hefty dividend payouts, since they are required by law to distribute at least 95 percent of their earnings to shareholders each year. The average dividend yield last year was 8.4 percent.

You can pick from about 180 REITs that trade on the New York Stock Exchange, the American Stock Exchange and the Nasdaq. Tom Grzymala, a certified financial planner in Alexandria, Va., recommends a combination of three REITs to gain exposure throughout the sector.

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Grzymala likes Health Care Properties (HCP: Research, Estimates), which invests in assisted living facilities and nursing homes; Plum Creek Timber (PCL: Research, Estimates), a producer of timber, and Thornburg Mortgage (TMS: Research, Estimates), which invests in adjustable-rate mortgages.  

"REITs are a superior investment," Grzymala said. For example, HCP earned 39 percent in the trailing 12 months, while Thornburg has a three-year return of 54 percent. Plum Creek earned a more modest 7 percent this year -- but still a better bet than the S&P, which is just about breaking even.

In mutual funds, you'll find plenty of good performers to choose from. Fidelity Real Estate, with $1.2 billion in assets, was the top-performer in its category in the 1990s with an annualized return of 9.9 percent, according to Morningstar. It earned 30 percent in 2000, 9.5 percent last year and is up around 6.3 percent this year.

Buller is overweighted in retail and warehouses, but lighter on hotels, which recovered from the Sept. 11 attacks and are a little too expensive these days.

There's also Security Capital U.S. Real Estate, which focuses on multifamily housing, said manager Ken Statz. The fund earned 35 percent in 2000 but gained a more modest 7 percent last year. Statz attributed the results to a robust housing market. With everybody buying homes, it hurt multi-family rentals. The fund is up around 6 percent this year.

A third option is Third Avenue Real Estate Value, which earned 30 percent in 2000 and 18 percent last year. This year, it is up around 4 percent.

Manager Mike Winer likes real estate operating companies such as St. Joe Company (JOE: Research, Estimates) and Catellus Development (CDX: Research, Estimates). Both have good balance sheets and strong management, he said.