On September 1, equity REITs will be relocated on the stock market from the financial sector to a new real estate sector. This is a big change for the stock market, and it will have an effect on the market as a whole as well as individual investors.
Sector Transitions
The first immediate change that will affect investors is simply the number of sectors within the S&P 500 and Dow Jones indices and the iShares MSCI EAFE (NYSE:EFA). Currently, there are 10 sectors within these indices and the new real estate category will bring the total up to 11:
- Energy
- Materials
- Industrials
- Consumer discretionary
- Consumer staples
- Healthcare
- Information technology
- Telecom services
- Utilities
- Financial
- Real estate
The new real estate sector will be similar in size to the smaller categories like utilities, materials and telecommunications, each of which constitutes about 3% of the S&P 500.
All of the existing sectors will remain the same – except for Financial. Previously, investors traded REITs and land companies in the financial sector, but these will now be moved to the real estate sector. Mortgage REITs will stay in the financial sector.
More Attention For Real Estate
By giving real estate its own sector, there is the chance that investors will start paying more attention to it. Since it was included in the large financial sector (which constitutes 16% of the S&P 500), it is likely that investors failed to really understand how REITs could pay dividends. This helps to establish real estate as a viable asset that can be beneficial when building a portfolio.
The new classification could make real estate into less of a niche investment. This could mean that more investors will start using real estate stocks to diversify. Already, the majority of investors and consultants believe that upwards of 10% of any portfolio should be allocated to real estate, as it not only has the ability to offer up great returns but also has high dividend income.
We are already seeing many more individuals making real estate investments outside of the stock market. For example, investing in student housing and buying to let are options that could present some valuable returns. With real estate obtaining its own sector, it is possible that there will be a similar rise in interests in property on the stock market.
Potential For Reduced Volatility
Financial has been known to be the most volatile sector on the S&P 500, just behind Technology. Since real estate has been separated from this sector, it is likely that its own volatility could be reduced over time.
The allocation of real estate into its own sector is also likely to result in greater ownership of real estate stocks. This has the potential to lead to more liquidity which will reduce volatility overall.
In turn, reduced volatility will make real estate a more attractive option for investors. With more stability, investors can make better informed investments in this sector for greater success on the stock market.