Real estate ETFs outperform broader market despite rate pressures

Broad real estate exchange-traded funds XLRE, VNQ and SCHH have delivered double-digit year-to-date returns in 2026 while interest-rate sentiment created volatility across the sector.

The State Street Real Estate Select Sector SPDR ETF (XLRE) returned 11.1% year to date and recorded $190.6 million in inflows. The Vanguard Real Estate ETF (VNQ) rose 11.5% with $1.46 billion of inflows. The Schwab US REIT ETF (SCHH) climbed 15.2% and attracted $1.18 billion, including roughly $1 billion in late June. By comparison the S&P 500 has gained 9.6% over the same period.

Data center real estate investment trusts were a large source of gains inside those funds. The data center REIT group rose more than 37% year to date through May. Equinix reported first-quarter 2026 revenue of $2.47 billion, up 12.1% from a year earlier, and its stock has advanced about 33.9% in 2026. Digital Realty posted $1.63 billion in first-quarter revenue, a 16.7% increase year over year, and its shares are up about 13.2% this year. Both firms are among the largest holdings in the broad real estate ETFs.

The Federal Reserve has held its policy rate steady since the December 2025 meeting. Early expectations for rate cuts in 2026 faded as inflation remained elevated, and market pricing shifted toward the possibility of at least one rate increase after a weaker-than-expected jobs report and flat rates through June.

Interest-rate moves affect real estate companies that rely on borrowed money for construction and acquisitions. Higher rates raise borrowing costs for property owners and builders. REITs must distribute at least 90% of taxable income to shareholders, and when yields on fixed-income assets rise some investors reallocate from REITs to bonds, which can put downward pressure on REIT share prices.

Other factors influenced flows and returns. Corporate actions and merger and acquisition activity among large REITs coincided with heavy inflows to SCHH in late June. XLRE tracks the S&P Real Estate Select Sector Index and holds a concentrated portfolio of roughly 30 REITs from the S&P 500, excluding mortgage REITs. VNQ follows the MSCI US Investable Market Real Estate 25/50 Index and offers broader REIT exposure. SCHH seeks to mirror the Dow Jones Equity All REIT Capped Index. Reported expense ratios are 8 basis points for XLRE, 13 basis points for VNQ and 7 basis points for SCHH.

Future ETF returns will be influenced by demand for data center capacity, Federal Reserve policy decisions, trends in borrowing costs and bond yields, and any further corporate developments among large REITs.