AT THE HEIGHT

of the last bull market, the S&P 500's biggest stocks led the charge. Think back to 1999 and 2000, and you'll recall how

General Electric

Cisco Systems

Microsoft

Why did investors own those stocks? Essentially, they had to. Most indexes, like the S&P 500, are weighted by market capitalization. This means the biggest stocks have a disproportionate impact on the index's overall performance. GE, for example, accounts for roughly 3% of the entire S&P 500. The top five stocks make up more than 10% of the index's total capitalization. So while there are, indeed, 500 stocks in the index, there are less than a dozen or so that actually matter to its overall return. If you want the index, then you simply must own those big component names.

While I don't believe that index investing is a can't-lose strategy, in a bull market it works. When a particular area is hot, simple exposure to the asset class itself is what matters more than savvy stock picking. So in a strong market, it makes sense to own the index's dominant names. When money flows into a particular sector, it's the biggest and most liquid stocks that attract the bulk of incoming dollars.

As we often point out, trends tend to persist. And one of the most dominant and relentlessly bullish trends in recent years has been in real-estate investment trusts, an asset class known as REITs that has quietly turned out stellar returns in any number of market environments. Despite their conservative reputation as income stocks, the lion's share of gains has actually come from price appreciation not dividend yield.

Nobody knows the future. But providing that one uses sound position size, stop-loss protection and trading technique, I believe that in today's market, REITs are a smart destination for new money, despite their multiyear run-up. Because the asset class itself is so strong, I'm focusing on investments that either dominate or replicate the major REIT indexes. The theory is, when the herd finally does come running, it'll want those liquid and largely capitalized names. As usual, I'm just trying to stay a few steps ahead.

The biggest name is REITs is Sam Zell, whose Equity Office Properties Trust remains the largest and most widely held company in the sector. It owns more than 730 office buildings in 20 states and, at $11.5 billion in market cap, is the leading component of most broad benchmarks. When an institution wants exposure to REITs, this is the stock it'll most likely buy.

Not far behind Zell's office-property firm is his residential one, and although Equity Residential isn't as well known as its counterpart, at $8.2 billion in market cap, it remains a weighty and influential part of the REIT universe. Equity Residential owns or has interests in more than 1,030 properties across 35 states, and the stock sports a 5.8% dividend yield plus a coveted spot in the S&P 500 index.

YTD performance of iShares Dow Jones U.S. Real Estate Index Fund (IYR), iShares Cohen & Street Realty Majors Index Fund (ICF) and streetTRACKS Series Trust Wilshire REIT Index Fund (RWR).

Despite the advent of Internet shopping, consumers are still flocking to malls, many of which are owned by Simon Property Group. This $11 billion company has interests in 238 properties, including regional malls, community shopping centers and a handful of mixed-use properties that, in aggregate, comprise more than 183 million square feet of leasable space. The stock is up more than 50% in the last 52 weeks.

Besides owning stocks, most individual investors find the best way to get exposure to an index is simply to buy it outright. And thanks to the proliferation of exchange-traded funds, or ETFs, it's possible to purchase a market-cap weighted portfolio of REITs in one simple transaction.

Of the handful of products available, the best known is iShares Dow Jones U.S Real Estate Index, which has been traded on the American Stock Exchange since June 2000. Trading more than 56,000 shares a day, IYR distributes dividends quarterly and is an excellent proxy for large-cap U.S real estate. In addition to Equity Office (6.8% of assets), Equity Residential (4.6%) and Simon Property (4.5%), its largest holdings include General Growth Properties at 3.3% and Vornado Realty Trust at 3.0%. One-third of the fund's assets make up the top 10 holdings.

While IYR might be the most well-known REIT ETF, the fund most focused on large-cap names is iShares Cohen & Steers Realty Majors Index. Most notable is the portfolio's unabashedly nondiversified allocation to the industry's biggest names. While IYR holds 78 securities, for example, ICF boasts a mere 31, including weighty 7% positions in the Big Three that we outlined earlier. Because the portfolio holds fewer names, even its No. 6 holding, Prologis, constitutes a healthy 5% position.

The least active (and curiously, most highly priced) option is StreetTracks Series Trust Wilshire REIT Index, which features a moderately concentrated portfolio of 87 common stocks. Thirty-eight percent of RWR's assets are concentrated in its top 10 holdings, which, in addition to the names previously discussed, include Archstone-Smith Trust at 4.7% of assets, Kimco Realty at 4.3% and Boston Properties at 4.1%.

Jonathan Hoenig is managing member at Capitalistpig Asset Management, a Chicago-based hedge fund. At the time of writing, Hoenig's fund held positions in many of the securities mentioned in this article.