It was recently announced that real estate is going to become the newest S&P sector, beginning at the end of August 2016. Traditionally, real estate has been a subsector of the financial sector, but now the S&P Dow Jones Indices seems to believe that it makes sense to separate the two.
Source: Flickr user Mark Moz.
However, not all stocks associated with "real estate" are being moved to the new sector. Here's what the new real estate sector will consist of and what impact in might have on you as an investor.
The real estate sector: Who's in and who's out?
The proposed changes would include renaming the real estate investment trust, or REIT, industry as equity real estate investment trusts, mainly to make a distinction between them and mortgage REITs.
Equity REITs, or those that invest in actual properties, will be included in the newly formed real estate sector. Examples include Realty Income, Equity Residential, and Public Storage, which own and operate retail, residential, and warehouse/storage properties, respectively.
Mortgage REITs like Annaly Capital Management, on the other hand, will not be included in the new sector. Rather, they will remain in the financial sector in a newly created sub-industry called mortgage REITs. Basically, the business model of mortgage REITs is more like that of a lender, profiting from the spreads between interest rates, and actually has very little to do with real estate.
I view this as a very positive change. If nothing else, this will create some distinction between the two types of REITs, which are extremely different from one another. The investing public will certainly benefit from these companies being classified as two different businesses, which they are.
What changes should you expect?
We might see a few new real estate index funds hit the market once the sector is established, but other than that, investors won't face much difference when the changes go into effect on Aug. 31, 2016.
One change worth noting is that the financial sector (and index funds that track it) will become much more narrowly defined. The financial sector currently includes all REITs, and it won't when the new sector goes into effect. In other words, investing in the financial sector will become more of a pure play on banks, insurance companies, and related firms.
Also, it will be a little easier to track real estate's overall performance as an investment class, since right now it is buried in the financial sector and difficult to gauge how REITs are doing as a whole. So, for example, if you own one or two REITs and want to find out how your positions are doing in relation to the broader market, that information could become easier to find.
It's more about popularity and globalization
So, while it might become a little easier to invest in, say, a basket of REITs through an index fund, the creation of a new S&P sector shouldn't really cause much of a change for investors.
The main reasons for creating the new sector are the popularity and globalization of real estate as a distinct asset class in investors' strategies. According to MSCI, investor feedback indicates that there are enough significant differences between equity REITs and financial services companies that they deserved to be their own sector.
To sum it up, while this may not fundamentally change anything for you as an investor, it is one way that the S&P indices are attempting to more accurately reflect the current investing environment. For real estate investors, it may make it easier to keep track of how real estate is doing as a whole, and it might create a few new index funds to help you easily diversify your own holdings.
