When you hear “recession,” you might think of the market going down, job loss, or stagflation. What probably doesn’t come to mind are utilities, health care, and consumer discretionary. Yet, during times of chaos, these sectors are often seen as safer places to put your cash — away from more volatile industries. There’s also another that might come to mind; some might even call it the hardest sector in the S&P 500 (emphasis on hard).

Hard, as in hard asset: Real estate is an asset class known to outperform during downturns as investors turn to hard assets for reliable cash flows and capital preservation. Many buy into these assets through ETFs like the Vanguard Real Estate ETFVNQ

or SPDR Real Estate ETFXLRE

. And in recent weeks, they’ve provided some solace as the broader market has seen gyrating valuations — with sectors swinging from gains to losses and back again.

• TheXLRE
  is up 2.7% year-to-date, outstripping the broader S&P 500’s 5% decline — but what’s truly notable is that it has spent just five days below where it started the year.
• Still,XLRE
  shareholders might feel they missed the train since the pandemic — it’s up just 32% over the past five years, compared with the 124% return from the index.

State of Real Estate

Even now, theXLRE

’s returns might not look particularly compelling, but as the S&P 500 fell for its fifth consecutive week, the property market offers investors consistent cash flow and an opportunity for upside. And after a rough few years in the sector, that opportunity could be one of the better ones in the market.

• This time last year, Blackstone indicated that the real estate sector had “bottomed” — since then, theXLRE
  is up ~7%, lifted by a holistic recovery in commercial real estate (CRE).
• For years, CRE has clouded the picture for real estate investors, but The New York Times reported Friday that the “worst is probably over,” which could help clear the air in the sector.

Lessons learned: Today, many REIT ETFs have broadened their exposure to more recession-resistant sectors. The world’s largest real estate ETF by assets under management, the Vanguard Real Estate ETF, now counts retail REITs (13%), healthcare REITs (12.7%), and industrial REITs (11.2%) among its biggest holdings. This specialization may make some REIT ETFs more attractive, but there’s also nothing wrong with building your own portfolio by picking individual REITs.

Past, present, future: North American REITs have outperformed the S&P 500 since the 1980s — delivering 14% annual returns, including dividends and growth. That track record could lead some to believe the narrow stretch of underperformance from REITs is a ruse, but past results don’t guarantee future performance. And with profit margins expected to decline, investors will need to weigh whether REITs offer a better bet than beaten-down small caps, discounted tech stocks, or other hard assets like gold.