Real estate stocks finally became the eleventh GICS sector at the close of U.S. markets yesterday and while the group has been one of the best-performing areas of the equity market this year thanks to an accomodative Federal Reserve, some market observers are concerned real estate equities are primed for a pullback.
Real estate investment trusts and sector-related exchange traded funds have been among the most popular investments in an extended low-rate environment. However, after this year’s run, REITs may be starting to look pricey.
The Vanguard REIT ETF (NYSEArca: VNQ) is the eighth most popular ETF of 2016, adding $4.6 billion in net inflows year-to-date, according to ETF.com.
SEE MORE: Preparing for Big Changes to a Popular Financial ETF
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.
[related_stories]However, some market participants believe active managers are already positioned for real estate becoming its own sector, which could keep a lid on the impact the transition will have on ETFs such as VNQ.
“REITs have outperformed the market this year and still retain their place as one of the top-performing asset classes among all industries. But real estate’s heyday could be winding to a close, according to Eddy Elfenbein, editor of the Crossing Wall Street blog,” reports CNBC.
Goldman Sachs Group Inc. warned that the area is growing too risky for investors after the outperformance.
“Real Estate has outpaced the S&P 500 by 156 basis points year-to-date, which has hurt large-cap mutual fund returns given their underweight allocation to the sector,” Goldman Sachs analysts led by David Kostin One said in a note, according to Bloomberg.
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“Ari Wald, technical analyst at Oppenheimer, also believes that real estate’s golden times could be over soon. Looking at a long-term chart of the REIT-tracking ETF VNQ, Wald emphasizes that real estate’s high support of $87 still stands, especially as the 200-day moving average continues its rise,” according to CNBC.
In addition to VNQ, the SPDR Dow Jones REIT ETF (NYSEArca: RWR) and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) are among the most popular REIT ETF plays.
For more information on real estate investment trusts, visit our REITs category.
Vanguard REIT ETF
