Real Estate Sector Outperforms: 3 Stocks to Gain Exposure

Key Points

• The real estate sector ETF XLRE is consolidating near its highs, just 2.7% from its 52-week peak. It has 10.6% YTD gains and short-term relative strength.
• The FED rate cut and additional anticipated cuts ease borrowing costs, boost REITs, and improve the sector’s outlook.
• The XLRE ETF provides broad exposure to the sector, Realty Income (O) offers steady dividends, and Equity Residential (EQR) benefits from strong rental demand.

The real estate sector is holding firm in a bullish formation, displaying notable resilience compared to the broader market. The Real Estate Select Sector SPDR Fund ETF NYSE: XLRE has been consolidating near its highs, just 2.7% away from its 52-week peak, setting the stage for a potential breakout in the year's final quarter. While the broader market faced selling pressure mid-week, with the SPY ETF dropping nearly 1% on Wednesday, XLRE demonstrated relative strength, closing the day up almost 1%. This brings its YTD gains to 10.6%, supported by momentum over the past several months.

A Shift From Headwinds to Tailwinds

Over the past year, the real estate sector grappled with rising borrowing costs, which weighed on property values and REIT stock performance. However, the Fed’s recent rate cuts and signals of additional reductions are turning this headwind into a tailwind for the sector. REITs, which struggled in higher-rate environments, now stand to benefit from reduced borrowing costs.

Momentum is evident in the sector, with XLRE up over 20% in the last six months and net fund flows increasing by 14.51% over the past three months, suggesting growing investor confidence. This shift follows a lengthy consolidation period that persisted for over a year, but the recent strength indicates that real estate bulls are now in control.

In a positive indicator for the sector, RE/MAX Holdings’ September Housing Report noted that while home sales dropped 13.3% from August (a seasonal pattern), the median sale price held steady at $429,000, up 4.6% from last year. RE/MAX President Amy Lessinger highlighted that rising home inventory offers buyers more options, adding that lower mortgage rates could spark increased activity heading into 2025.

3 Real Estate Stocks That Offer Exposure to This Bullish Trend

Why XLRE Is a Smart Option for Passive Real Estate Exposure

Real Estate Select Sector SPDR Fund NYSE: XLRE provides broad exposure to real estate stocks, excluding mortgage REITs, with top holdings like Prologis (9.91%) and American Tower (9.24%). It's an attractive option for investors looking for diversified sector exposure with a 3.09% dividend yield and a low 0.09% expense ratio.

The ETF holds a Moderate Buy rating, with analysts expecting more upside based on its consensus price target. The recent consolidation near highs signals the potential for a Q4 breakout, especially if the broader market stabilizes near highs amidst further rate cuts. For investors seeking passive exposure to the real estate sector’s recovery, XLRE offers a well-rounded approach with minimal stock-picking risks.

Fed Rate Cuts Could Boost Realty Income’s Performance Further

Realty Income NYSE: O Known as "The Monthly Dividend Company," Realty Income specializes in triple-net leases, where tenants cover property expenses like taxes and maintenance. This REIT has a 4.92% dividend yield and an impressive history of increasing its payout for 108 consecutive quarters.

Realty Income has gained 12% YTD and almost 20% over the past six months, outperforming many of its peers. Its focus on free-standing commercial properties in the U.S., U.K., and Spain makes it a reliable income-generating asset. With the Fed shifting to rate cuts, Realty Income is well-positioned to benefit from the changing economic environment, making it an attractive choice for income-seeking investors.

Real Estate Momentum Boosts EQR’s Appeal for Investors

Equity Residential NYSE: EQR focuses on luxury apartment properties in dynamic urban markets like New York, San Francisco, and Seattle and is expanding into cities like Denver, Dallas, and Atlanta. With a 3.56% dividend yield and a 24% YTD return, EQR has been a strong performer in 2024, driven by robust rental demand.

EQR’s portfolio of over 80,000 apartment units is tailored for long-term renters, offering stability and diversification in uncertain markets. With the real estate sector gaining momentum, EQR’s short-term strength makes it appealing for investors looking to capitalize on recent momentum.

Like the XLRE, EQR is consolidating above rising key moving averages, just 3.7% away from its 52-week high. From a technical perspective, it looks primed for a breakout above its 52-week highs, but it's important to note that the company is set to report its third-quarter results on Wednesday, October 30, after the market close.