Standard & Poor’s gives REITs own sector, the first new one since 1999

On Wednesday, real estate investment trusts will become the first new sector for the Standard & Poor’s 500 index since 1999, which may add some tailwinds to the already hot market.
The new sector will consist of the current real estate industry group, minus mortgage REITs, which will stay in the financial sector. (The entire real estate sector, up to now, has been counted among the financials).
The change will reduce the financial sector’s dividend yield from 2.25% to 2.03%, according to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. The real estate sector will have a 3.16% yield. One key difference: REIT dividends are usually taxed at your individual income tax rate. Long-term qualified dividends are taxed at a maximum 20% rate.
The new sector in S&P’s Global Industry Classification Standard, known as GICS, will have 28 issues with a market value of about $605 billion. New members of the real estate sector will include American Tower (AMT), Boston Properties (BXP), General Growth Properties (GGP) and Public Storage (PSA).
“This is not just rearranging the place cards on the table,” writes David Blitzer, chairman of the S&P Index Committee. “The GICS sectors are widely used to gauge how asset allocations align with markets. With real estate added to the top line of sectors, investors will notice where real estate is and whether they are over or under weighted. Analyses of market movements and fundamentals will focus on real estate the same way they focus on industrials or technology.”
Real estate funds have soared 11.44% this year, far outpacing financial funds’ 1.70% gains.
REITs first entered the S&P 500 in 2001. “Based on comments from investors, the real estate industry and others, S&P Dow Jones Indices and MSCI announced in March 2015 that real estate would leave the financial sector and become its own 11th sector in GICS,” Mr. Blitzer wrote.
The reallocation could prompt some buying by passive index funds. But in theory, the move is simply rearranging the amount of REIT shares within the Standard & Poor’s 500 stock index. At least in the short term, index funds probably won’t be rushing to bulk up on REITs. “Near-term, we’ve seen a bit of upward pressure on REIT prices as investors have reduced their underweight to the asset class,” said Chris Hartung, portfolio manager on the Lazard US Realty Equity Portfolio (LREOX).
He does think the creation of the new sector will be a long-term boost to REITs in the long term. “It further focuses people on why real estate should be a fundamental part of portfolio allocation,” Mr. Hartung says. “It puts a spotlight on the benefits one gets from real estate.”