The increasing number of real estate index funds at this point in time doesn't seem to have had much effect on the way active real estate mutual fund managers operate. However, the creation of real estate exchange-traded funds, or ETFs, probably altered investment decisions by active fund managers.

It would seem the success of real estate index funds and associated ETFs (index funds that can be directly traded on an exchange) would be putting pressure on active fund managers to outperform the indexes. But, that isn't necessarily the case. "What kind of pressure," exclaimed Michael Winer, who manages the Third Avenue Real Estate Value fund, "We are not a REIT fund. We do have REITs in our fund. Our portfolio is more populated by real estate operating companies. We are just looking for some decent absolute return regardless of what a benchmark does."

And returns have been good, up almost 15 percent last year for Third Avenue, which is sponsored by Third Avenue Management LLC. "With an index fund, you are investing for mediocrity," Winer says

Third Avenue will not be offering a REIT index fund any time soon. Nor will Delaware Investment Advisors, which sponsors Delaware Pooled Real Estate Investment Trust I and II.

"We do not want to have a conflict of interest so we stick to one strategy," says Damon Andres, a vice president and senior portfolio manager at Delaware.

Is he feeling pressure from index funds to do a better job? Absolutely not, says Andres, "No pressure. What we have always done is try to produce superior risk-adjusted returns relative to our own index."

"The reality is, when you consider a full cycle, all those real estate index funds are going to end up pretty much the same way," Andres says. "There is a much higher degree of correlation among the index funds than the active funds."

Where ETFs have changed things is on the trading side, Andres says. "Investors are using these as short-term instruments and timing vehicles. That activity is causing a significant amount of daily volatility and technical aberrations in the market."

Exactly the same point David Lee, a portfolio manager with T. Rowe Price Real Estate Fund, makes: "There has been some discussion that the introduction of ETFs have added volatility to the sector. That's because investors such as hedge funds can short ETFs."

Normally, Lee's business as an active manager would have little to do with the index world, but market volatility touches everyone. "My bottom line would be, that I am concentrating on the fundamentals of stocks and less concerned about the technical machinations that are occurring based on index funds or ETFs," he notes. "Now, to the extent they add volatility to the sector that is not particularly pleasing as this sector has had a fair amount of stability."

As to the question of whether the growing number of index funds has put pressure on active managers to do better, Lee says that would be the case if active managers were measured against the performance of index funds.

But comparisons typically only show how well active managers have done, he says.

"I have rarely seen a large deviation between the performance of index funds and the performance of actively managed funds. What I mean is they are directionally the same," Lee adds. "As a group, active managers have done a very good job in this sector of providing good stock selection relative to the indexes."