Real estate is movin’ on up, breaking out to a sector all its own from a position as an industry group under the financial-sector umbrella.
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MSCI made the transition at the close of business Wednesday, while the number of sectors in the S&P 500 will expand on September 16 from 10 to 11. It’s the first time since the Global Industry Classification Standard (GICS) has been updated since its creation in 1999.
The new sector will include the current Real Estate Industry Group, excluding mortgage real-estate investment trusts (REITs), which will remain under the financial sector umbrella.
When GICS was introduced, REITs were considered alternative investments and not often found in mainstream indices, but in the years since, they’ve garnered more interest and attention from the investment community, David Blitzer, chairman of the Index Committee as S&P Dow Jones Indices, wrote in a June blog post explaining the decision to create a new sector.
“This is not just rearranging the place cards on the table….those who thought the financial crisis ended real estate investing were wrong; real estate and REITs are an important part of the market. With the new GICS sector, REITs will get increased attention,” he said.
With investors hungry for yield, and looking to riskier plays like high-risk corporate debt, to make money, REITs could be a good option to consider given their higher yield compared to financials, according to Christian Magoon, CEO of Amplify Investments.
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“I think it’s a nod to the growing importance and investment potential of REITs,” he said. “They’ve had about 15 years to be part of those indexes and are large enough and important enough to justify becoming their own sector…it’s a big vote of confidence for that structure in general.”
For investors in exchange-traded funds that track the financial sector – of which the most popular is State Street’s (STT) XLF financial sector ETF, the most important thing to note is the securities in the underlying portfolio are changing. That is likely to cause some volatility as portfolios rebalance to accommodate the new real-estate sector, Magoon said.
“There are a lot of people who own financials because of the yield and they might need to reassess that,” he explained. “My guess is they’ll want to consider the REIT sector for a portion of their assets just based on yield considerations.”
The financial-sector dividend yield will decline from 2.25% to 2.03%. Meanwhile, real estate has a 3.16% yield, compared to the S&P 500’s 2.1% yield, according to S&P Dow Jones Indices.
Gary Stroik, chief investment officer of WBI, said any volatility from portfolio reallocation is likely to be short lived.
“REITs are about 18% of the financial sector at the moment, so people who are in financials have to lighten up on those, but people are S&P guys should have them in their portfolios. Any of those dislocations will be short-term events and ultimately REITs are going to stand or fall on their own investment merits,” he said.