ETFSector.com Sector Insights | November 1, 2024 | Real Estate Sector
Price Action & Performance
The Large Cap. S&P 500 Real Estate Sector made a multi-month relative-high in September, but since then profit-taking, rising rates and competition for other outperforming sectors has begun to gnaw at performance. Now price, as proxied by XLRE, sits just above near-term support at the $42 level while the oscillator work is neutral and moving towards oversold levels.
At the industry level, Office REITs have seen some selling at the end of August but have outperformed the S&P 500 by 20% since the beginning of May. Healthcare REITs and Retail REITs are also outperforming over that period while Hotel and Resort REITs have been clear laggards relative to the other industries in the sector.
At the stock level our favorite names are IRM, CBRE, VTR and WLTW are rated the highest by our process. We are also constructive on BXP, DOC, AVB, EQR, ESS, UDR, KIM, REG, SPG, DLR and EQIX. As with the other min vol. sectors we are allocating to, the forward path of interest rates will likely have a large influence over performance. We see the 10yr Yield as overbought and at resistance and we expect yields will start to come back down in the near-term. Our view is informed by the weak price trend for Commodities as well as the potential for rates to stay above policy targets given investor positioning for an accommodative Fed.
Economic and Policy Drivers
This has been a period of renewed rotation as expectations for interest rate policy in the second half of the year come into focus and the Fed has confirmed with an initial 50bp cut to the target rate. A further 50 bps of cuts is expected by year end. However, the market function of investor positioning has gummed up the works in the near-term and we think that will lead to more periodic corrections and consolidations than expected for recovering industries.
Beyond the Fed, we are seeing some give back in post-pandemic behavior patterns as more co.’s start looking to get employees back into offices. With lower interest rates forecasted, we also see some investment come back into the REIT space. It is, after all, somewhat ironic that a structural housing shortage in the US has coincided with weak prices for Real Estate equities. An overbuild of office capacity into the pandemic is an overhang on the sector, but much bad news is priced in the Office REITs lagging the S&P 500 by almost 50% over the past 5 years. If rates continue lower, some office-to-residential conversion may become feasible. As we are seeing from the Residential REIT industry, those business lines are becoming more attractive as inflation pressures ease and rates move lower. The Fed has come out dovish, now the bond market needs to cooperate.
In Conclusion
XLRE continues its intermediate term bullish reversal and looks primed to continue in November. Low vol. sectors and commodities sectors have been the weakest areas of the market in 2024, and we continue to be under-exposed to both areas entering November. However, we are expressing our min vol. short through the Healthcare Sector. We are long XLRE for November with a +1.17% allocation vs. the S&P 500 Index.
Chart | XLRE Technicals
- XLRE 12-month, daily price (200-day m.a. | Relative to S&P 500 |MACD | RSI)
- We’ve seen enough over the intermediate term to get more constructive on the sector
XLRE Relative Performance | XLRE Industry Relative Performance | 3m
Data sourced from FactSet Research Systems Inc.
