- Changes to S&P 500 index will affect how people position in REITs ahead
- S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard
- Looking ahead, the new GICS classification will also further support the REITs sector
Exchange traded fund investors have some exposure to real estate investment trusts through their financial sector positions. However changes to the S&P 500 index will affect how people position in REITs ahead.
The S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard, creating a new Real Estate Sector from the Financial Sector.
“The changes to the S&P 500 index will be implemented after the close of business on September 16, 2016,” Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, said in a note. “S&P Global Market Intelligence, which operates independently from S&P Dow Jones Indices, thinks these changes will impact the way investors conduct sector investing.”
For instance, Howard Silverblatt, an index analyst with the S&P Dow Jones Indices, argues that the new REITs sector could sport an above-average dividend yield of 3.5%, behind telecom services and utilities. On the other hand, without the high-yield generating RETIs, the financial sector’s yield will dip to 2.0% from 2.3%.
The Financial Services Select Sector SPDR (NYSEArca: XLF) includes 91 components, 17 of which include REITs that yield more than 3.0%.
These high-yield REITs also have positive outlooks for the rest of 2016. Ken Leon, a REIT equity analyst for S&P Global Market Intelligence, believes these companies have strong cash flows to support dividend growth. For instance, HCP Inc. (NYSE: HCP) was one of 35 U.S. real estate companies that hiked dividends in the first two months of 2016.
Looking ahead, the new GICS classification will also further support the REITs sector.
“With the sector carve out of REITs we think asset managers and investors that build portfolios based on the S&P 500 index will focus more on REITs,” Rosenbluth added. “In our opinion, this should help all ETFs that have exposure to these stocks.”
In anticipation of the eventual S&P 500 changes, State Street Global Advisor came out with the Financial services Select Sector SPDR Fund (NYSEArca: XLFS) and the Real Estate Select Sector SPDR Fund (NYSEArca: XLRE) back in October.
XLRE will try to reflect the performance of the Real Estate Select Sector Index, which include real estate management and development and REITs, excluding mortgage REITs. The underlying index has a dividend yield of 3.42%.
XLFS will try to reflect the performance of the Financial Services Select Sector Index, which tracks areas like diversified financial services, insurance, banks, capital markets, consumer finance, thrifts, mortgage finance and mortgage REITs. The underling index has a dividend yield of 2.06%.
Moreover, investors can look to the Guggenheim S&P 500 Equal Weight Real Estate ETF (NYSEArca: EWRE), which follows an equal-weight indexing methodology but also tracks a similar portfolio as XLRE.