Real estate investment trust exchange traded funds may continue to enjoy greater attention ahead as the REITs sector formally becomes the 11th major industry segment of the S&P Dow Jones Indices at the end of the week.
REITs, which make up about 3% of the S&P 50o’s market valuation, will be splitting away from the financial sector on Friday, becoming the newest sector under the Global Industry Classification Standard, reports Mamta Badkar for the Financial Times.
The new sector will include real estate investment trusts and real estate management and development companies.
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“Clearly, there are significant differences between REITs and other segments of the financials sector, which may help explain some of the logic behind separating real estate from financials,” Nick Kalivas, a strategist at PowerShares, told the Financial Times.
When the S&P Dow Jones Indices and MSCI announced they would create an independent real estate sector, J.P. Morgan projected that active equity funds were so underweight toward REITs that the new sector could cause $100 billion flows to the category. Since the newly minted sector would rival in size to utilities, telecoms and materials sectors, a number of fund managers who have not included REITs exposure may eventually bulk up on real estate.
“This is likely to pressure some funds to add exposure to Reits,” Todd Rosenbluth, director of ETF & mutual fund research at S&P Global, told the Financial Times.
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REITs are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue are mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends.
Investors interested in gaining exposure to the broad REITs sector have a number of broad options available. For instance, the Vanguard REIT ETF (VNQ) , SPDR Dow Jones REIT ETF (RWR) and iShares Dow Jones US Real Estate Index Fund (IYR) are among the most popular REIT ETF plays.
In anticipation of the new REITs classification, State Street Global Advisor also came out with the Financial services Select Sector SPDR Fund (XLFS) and the Real Estate Select Sector SPDR Fund (XLRE) back in October – the fund operator, though, will still operate the broader Financial Services Select Sector SPDR (XLF) .
For more information on real estate investment trusts, visit our REITs category.