Sector Highlight: Real Estate – Location, Location, Location

Sector Highlight: Real Estate – Location, Location, Location

The real estate sector is red hot in the residential industry. There is also a tailwind in the commercial sector as well, but not as bullish, not yet anyway. The XHB the SPDR HomeBuilders ETF has had an extraordinary year. Marc Chaikin has pointed this out on numerous occasions, This is not to be confused with the XLRE, the SPDR Real Estate Sector Fund which focuses on the commercial real estate sector. Both are moving higher but for different reasons. XHB, is a byproduct of low rates, and the rush to move to suburbs or out of state, nationwide. This ETF also contains several companies that help furnish or renovate homes. 

The XLRE, on the other hand, focuses on commercial real estate. The Re-Opening effect is one thing for sure, however, the yield in this sector cannot be ignored. The issue is the safety of the yield. The XLRE sports a 3.4% dividend. 

With XHB being in a Bullish state and XLRE being Neutral Negative, the rating is telling the story. It is clear that low interest rates will benefit both areas of real estate, it is also clear that both offer potential upside. What is unclear is if the commercial real estate sector will sustain the blow from the work-from-home mentality that is the new normal. As I mentioned on the last Open Forum call and on the Options Session call, as investors we need to know the environment that we are in and be aware of the underlying trends in that environment. Do not try to guess, but rather just see it for what it is, be an umpire. It is not completely linear, it is a dynamic situation. Call ‘em like you see ‘em.  Over analysis is both tiring and potentially futile. The trend is truly your friend.  

XHB the SPDR HomeBuilders ETF, has had tremendous relative strength vs. the SPY for close to 10 months. The Chaikin Money Flow has had strong trends since the end of December 2020. With the ETF hitting new highs caution is certainly warranted at these levels, based on price. Look for pull backs to between $60-65, as long as relative strength remains bullish. Please note, the ETF did have a rating change to Bullish from Neutral over the weekend.  

It is also good practice to zoom out to view a longer term chart. Note the XHB vs. the SPY ratio chart shows a trend that was interrupted last year with the lockdowns but it quickly recovered and made new highs. 

Now compare that to the XLRE vs. the SPY, and this longer term chart depicts the damage that has been done. While this could be the beginning of a new opportunity, economic policy, and the new normal could weigh heavy on this sector. The trend is in its very early stages, so if you choose to fish in this pond, use a disciplined approach to risk management. 

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