In November 2014, S&P Dow Jones Indices and MSCI Inc. issued a press release announcing the creation of an 11th sector under the Global Classification Standard (GICS) structure. That sector, Real Estate, was implemented last week—marking the first time the GICS structure has been updated since it was created in 1999. Although the impact of this decision will play out over time, it now is clear that Real Estate Investment Trusts (REITs) have found their own home.
Formerly housed under Financials, the Real Estate sector will include equity REITs (REITs that own physical property), as well as real estate management and development companies. Mortgage REITs (REITs that comprise mortgage-backed securities) will remain within the Financials sector. The most immediate impact of this decision is its effect on various benchmarks widely used by investors. For example, the S&P 500 will include the Real Estate sector in its asset allocation beginning September 16. This will result in a 3.23% weight for Real Estate within the S&P 500 moving forward—which is greater than both Telecommunication Services and Materials. The market weight for Financials, on the other hand, will dip from 15.75% to 12.52%, and will rank below Healthcare as the second-largest sector within the index. The impact on many smaller cap indices—in which REITs make up a greater percentage of publicly-traded companies—is likely to be even more profound.
Asset managers undoubtedly will be forced to rehash how they both view the Real Estate sector and implement REITs in their portfolios. Historically, many asset managers and investors alike have underweighted REITs, since they were not deliberately carved out within their benchmarks. That is, a benchmark-aware investor could avoid REITs altogether by investing in enough financial stocks to remain sector-neutral. As asset managers who once underweighted real estate in portfolios begin to change their tune, demand for REITS could increase significantly, and potentially be a boon for the sector as a whole.
Source: Endowment Wealth Management