XLRE Trails the S&P 500 by 5% Despite Lower Interest Rates That Were Supposed To Help

Real estate ETFs promise two things: exposure to property markets without the hassle of being a landlord, and steady income from REIT dividends. The Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE) delivers both, but with a twist that matters more than most investors realize. This isn’t a broad bet on every corner of real estate. It’s a concentrated wager on specific property types that respond very differently to interest rate cycles, economic growth, and demographic shifts.

What You’re Actually Buying

XLRE provides access to 31 individual REIT holdings spanning the full spectrum of commercial property types—from healthcare facilities serving aging demographics to industrial warehouses powering e-commerce logistics. The fund’s structure keeps costs minimal with just a 0.08% annual fee while delivering a 3.44% yield, reflecting the legally mandated income distributions that make REITs attractive to income-focused investors.

The return engine here is straightforward: rental income from tenants flows to REIT shareholders as dividends, while property appreciation drives share price gains. The fund’s 8% portfolio turnover signals a buy-and-hold approach rather than active trading.

Three secular growth themes dominate the portfolio. Healthcare properties lead through Welltower Inc (NYSE:WELL)’s 10.21% position, capitalizing on Baby Boomer aging that will drive decades of demand for senior housing and medical facilities. Industrial logistics follows via Prologis Inc (NYSE:PLD) at 9.67%, where e-commerce growth creates insatiable appetite for last-mile distribution centers. Digital infrastructure rounds out the story through data center and tower REITs like Equinix Inc (NASDAQ:EQIX) and American Tower Corp (NYSE:AMT), benefiting from cloud computing expansion and 5G buildouts requiring physical facilities to house servers and transmit wireless signals.

Performance Reality Check

Real estate has struggled to keep pace with broader equities as rising borrowing costs compressed property valuations and made REIT dividend yields less competitive against risk-free Treasury rates. Over the past year, XLRE returned 6.52% while the S&P 500 gained 11.81%.

The performance gap widens over longer timeframes. XLRE’s five-year return of 34.07% trails SPY’s 73.63% gain, reflecting how the Fed’s tightening cycle disproportionately impacted rate-sensitive sectors like real estate.

Improving sentiment drove the fund’s 7.81% year-to-date gain through mid-February 2026 as falling Treasury yields made REIT dividends more attractive. The 10-year Treasury yield declined to 4.09% from 4.29% earlier in the month, reducing borrowing costs for property acquisitions and refinancing while narrowing the yield gap between REITs and bonds.

The Tradeoffs

Interest rate sensitivity cuts both ways. When rates fall, XLRE typically outperforms as lower borrowing costs boost property valuations and REIT dividends become more competitive with bonds. When rates rise, property valuations compress and the fund lags. Housing starts declining 16.4% year-over-year to 1.25 million units signals moderating construction activity that could pressure residential and construction-related REIT subsectors while potentially benefiting existing property owners facing less new supply competition.

Concentration risk matters too. The top 10 holdings represent 56.58% of the fund, meaning performance hinges heavily on a handful of large REITs.

XLRE works best as an income-focused diversifier for investors who want real estate exposure without direct property ownership and can tolerate underperformance during rate-hiking cycles.