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Real estate has always been considered an “alternative” asset class within the financial sector. But the real estate sector has matured over the past several years, and that classification is changing. The S&P Dow Jones Indexes and MSCI recently announced the addition of the Real Estate sector as the 11th headline sector under the Global Industry Classification Standard (GICS), effective August 31, 2016.
In this article, we will look at the implications of the change and the exchange-traded funds (ETFs) that could be most affected.
What It Means
The GICS is an industry taxonomy developed by S&P and MSCI in 1999 for the global financial community. Since then, it has become the most widely used classification system for stock exchange-listed equities around the world. Companies listed on S&P and MSCI financial market indexes are assigned to a given sector and industry group depending on their principal business activity, which then qualifies them for inclusion in various indexes and ETFs.
“Real Estate is an important and growing part of the major economies throughout the world,” wrote S&P and MSCI in a statement. “To reflect this and support good financial analysis, GICS is introducing an eleventh sector for Real Estate and redefining Financials to exclude Real Estate. This is an example of our ongoing effort to ensure that GICS is reflective of today’s markets.”
Under the prior classification, real estate was listed as a sub-industry under the financial sector, alongside banks, insurance and diversified financials. The new change will move real estate from an industry group to its own sector, marking the first major change since the GICS was originally released, in 1999. The move could open the door to a greater number of indexes focused on the sector, as well as widen analyst coverage across the board.
According to Cohen and Steers, there are 11 important benefits from the change:
- Greater awareness of real estate as a diversifier.
- Increased demand for listed real estate.
- Better understanding of REITs.
- Lower correlations.
- Lower volatility.
- Financial ETFs may lose yield, but gain focus.
- Further validation of the REIT structure.
- More REIT IPOs and REIT conversions.
- An expanding global opportunity set.
- Greater inclusion in 401(k) plans.
- More focus on real assets.
Impact on ETFs
The reclassification of real estate will have a significant impact on any real estate entity trading on stock exchanges, including real estate investment trusts (REITs). For instance, financial advisors relying on GICS to create a well-rounded portfolio may recommend greater exposure to real estate for their clients given that it’s one of 11 sectors, which could translate to capital inflows to ETFs focused on REITs and other real estate investments.
The most popular real estate ETFs include:
In this article, we will look at the implications of the change and the exchange-traded funds (ETFs) that could be most affected.
| Symbol | Name | Assets (‘000s)* | Avg Volume* | YTD Return* |
|---|---|---|---|---|
| (VNQ ) | Vanguard REIT ETF | $36,643,891 | 3,696,806 | 16.70% |
| (IYR ) | iShares U.S. Real Estate ETF | $5,063,538 | 8,120,969 | 14.80% |
| (RWX ) | SPDR Dow Jones International Real Estate ETF | $4,776,444 | 596,743.00 | 10.30% |
| (ICF ) | iShares Cohen & Steers REIT ETF | $4,296,240 | 222,078.00 | 13.20% |
| (RWR ) | SPDR Dow Jones REIT ETF | $3,989,553 | 257,152.00 | 13.90% |
According to Fidelity , the removal of real estate from the financial sector could also cause that sector, and its ETFs, to become more volatile with positive exposure to long-term rates. Real estate would then become a relatively low-beta sector of its own, with high correlations to defensive sectors like utilities and healthcare. That said, the financial sector would still have an absolute risk and beta in the “middle of the pack” compared with other sectors of the economy.
The Bottom Line
The GICS change could have a dramatic impact on the real estate market driven by evolving perceptions and asset allocations. Investors may want to take a closer look at many real estate-focused ETFs as an opportunity to profit from the move, since these ETFs could see greater buying from financial advisors and 401(k) plans. At the same time, the financial sector could see some adjustments from the removal of real estate, which makes the asset class a lot riskier.
