T
he real estate sector is showing remarkable resilience, bucking the broader market trend. The Real Estate Select Sector SPDR Fund (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 final quarter of the year. While the broader market experienced selling pressure mid-week, XLRE demonstrated relative strength, closing 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 has benefited the sector, as the Fed's recent rate cuts and signals of additional reductions have turned a major obstacle into an opportunity. 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.

    The recent strength indicates that real estate bulls are now in control, following a lengthy consolidation period that persisted for over a year. A positive indicator for the sector is RE/MAX Holdings' September Housing Report, which 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.

    For investors seeking passive exposure to the real estate sector's recovery, XLRE offers a well-rounded approach with minimal stock-picking risks. The ETF holds top holdings like Prologis and American Tower, providing broad exposure to real estate stocks, excluding mortgage REITs. It has a 3.09% dividend yield and a low 0.09% expense ratio.

    The recent consolidation near highs signals the potential for a Q4 breakout, especially if the broader market stabilizes near highs amidst further rate cuts. Realty Income (O) and Equity Residential (EQR) are also well-positioned to benefit from the changing economic environment, with Realty Income specializing in triple-net leases and EQR focusing on luxury apartment properties in dynamic urban markets.

    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. Equity Residential has been a strong performer in 2024, driven by robust rental demand, with a 24% YTD return and a 3.56% dividend yield.

    Both Realty Income and Equity Residential are consolidating above rising key moving averages, just 3.7% away from their 52-week highs, making them appealing for investors looking to capitalize on recent momentum.