Now that major indices have given real estate investment trusts their own Global Industry Classifications Standard sector designation, REITs-related exchange traded funds could improve as managers shift more assets into the area to bring their own allocations up to snuff.
For instance, investors can capture broad REITs exposure through ETFs like the Vanguard REIT ETF (NYSEArca: VNQ), iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) and SPDR Dow Jones REIT ETF (NYSEArca: RWR). VNQ and RWR both exclude mortgage REITs and non-real-estate specialty REITs. IYR covers all domestic REITs.
VNQ has a 0.10% expense ratio and a 3.19% 12-month yield. IYR has a 0.45% expense ratio and a 3.45% 12-month yield, RWR has a 0.25% expense ratio and a 2.91% 12-month yield.
After the close of U.S. markets Monday, S&P Dow Jones Indices and MSCI (NYSE: MSCI) announced that real estate will become the eleventh Global Industry Classification Standard (GICS) sector. REITs will be split off from financials services to form its own sector, with a 2.5% total value of the S&P, reports John Authers for Financial Times. [Real Estate Gets Sector Status; How That Will Affect ETFs]
With the new classification, active managers who follow the MSCI or S&P benchmarks may have to think about their allocations to better reflect performance levels compared to benchmark indices. Additionally, many institutions currently classify the sector as an alternative investment, so moving REITs into the mainstream may increase the asset class’ exposure.
Consequently, real estate investments could experience more interest, buying and potentially improved performance in the coming months ahead. The change is not imminent as the sector changes will occur after markets close on Aug. 31, 2016, but investors will likely shift sector weights in the meantime.
Investors had “confirmed that real estate is now viewed as a distinct asset class and is increasingly being incorporated separately into strategic asset allocation,” according to MSCI and S&P.
Specifically, real estate is typically bought for its yield and as a real asset, whereas banks are more volatile and act cyclically.
Additionally, Greenwich Associates has found that institutional investors are driving the build up in the real estate space, with half of pension consultants recommending clients to raise weights in listed real estate as a way to diversify their portfolios. REITs have shown lower correlation to the broader equities market and they provide some inflation protection. [REIT ETFs for Income Generation and Diversification]
According to MSCI data, real estate assets would have been the third-strongest performer of the 11 GICS sectors in developed economies, behind information technology and consumer discretionary sectors, since March 2009. In the U.S., listed real estate companies have quadrupled since the financial crisis low while the S&P 500 index tripled.
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.