ETF Insights| October 1, 2024
We start October long XLRE in our portfolio.
Price Action & Performance
XLRE made a multi-month relative high in September. The price action has improved dramatically since June and the sector is close to market performance over the trailing 12-month period despite serious headwinds at the beginning of the year for the sector. Oscillator work has rolled over from overbought conditions with the RSI at a “bull trend oversold” level but not an outright oversold level. We’re betting the near-term correction will be seen as an accumulation opportunity as lower interest rates open more opportunities for the sector.
At the industry level, Office REITs, Healthcare REITs and Residential REITs are leading the Sector over the past 6 months with all 7 industries outperforming since July 1. Similar to the XLU and its industries, this is happening against a backdrop of long-term underperformance.
At the stock level we are seeing broad improvement with a high correlation. Standout stocks are few and far between, but we see clear bullish reversals in residential real estate names, Healthcare REITs and Retail REITs. Our favorite stocks in the sector are IRM, EXR, VTR and WELL.
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.
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.
In Conclusion
XLRE continues its intermediate term bullish reversal and looks primed to continue in October. We are long XLRE for October with a +1.20% 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
XLRE Street Analyst Ratings and Price Targets:
Data sourced from FactSet
