Getting Ready For The REIT Sector Transition With Two New ETFs

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State Street Corp (NYSE:STT)'s State Street Global Advisors (SSgA), the third-largest U.S. issuer of exchange-traded funds, added to its already expansive lineup of sector ETFs Thursday with the debuts of the Financial Services Select Sector SPDR Fund (NYSE:XLFS) and the Real Estate Select Sector SPDR Fund (NYSE: XLRE).

SSgA introduced the new ETFs ahead of real estate becoming the eleventh Global Industry Classification Standard (GICS) sector. That change is scheduled to occur after markets close on August 31, 2016. In November 2014, S&P Dow Jones Indices and MSCI, two of the largest providers of indices for use with ETFs, announced real estate previously included as part of the financial services group would become its own sector.

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Changes Ahead

Feedback from the annual GICS structural review confirmed that Real Estate is now viewed as a distinct asset class and is increasingly being incorporated separately into the strategic asset allocation of asset owners, said Remy Briand, managing director and global head of equity research at MSCI, in a statement issued last November.

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Investors told us that there are significant differences between public Real Estate and Financial companies and therefore Real Estate deserves a dedicated GICS Sector.

The Real Estate Select Sector SPDR follows the Real Estate Select Sector Index and is home to 25 stocks. Specialized and retail REITs combine for over 53 percent of the new ETF's weight, according to issuer data.

A Closer Look AT XLRE

Simon Property Group Inc (NYSE:SPG), the largest U.S. REIT, is XLRE's largest holding at a weight of 12.6 percent. American Tower Corp (NYSE:AMT) is the new ETF's second largest holding at a weight of 8.4 percent.

A Closer Look At XLFS

The Financial Services Select Sector SPDR tracks the Financial Services Select Sector Index and is home to 63 stocks. The Class B shares of Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK-B) are that index's largest holding at 10.3 percent, just ahead of the 10.2 percent allocated to Wells Fargo Co (NYSE:WFC), according to State Street data.

Will XLFS And XLRE Push Out Or Alter XLF?

With the debuts of XLFS and XLRE, some advisors and investors might question what will become of the Select Sector Financial Slct Str SPDR Fd (NYSE:XLF), the largest of the nine sector SPDRs with $17.3 billion in assets under management.

For now, it appears as though XLF, an ETF that allocates 16.2 percent of its weight to REITs, will continue existing in its current form. That is just speculation, but the expectation is not unreasonable. After all, there are currently 10 GICS sectors, but there is not a telecom SPDR because that sector is included as part of the Technology SPDR (ETF) (NYSE:XLK), the largest technology sector ETF.

With the exclusion of REITs, XLFS essentially ratchets up the weights of some of the big name holdings found in XLF. For example, Berkshire Hathaway and Wells Fargo have weights in XLF of 8.6 percent and 8.5 percent, respectively.

XLFS and XLRE are slightly less expensive than the established sector SPDRs, charging 0.14 percent per year compared to 0.15 percent for the remainder of the suite.

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