More Help Coming For REIT ETFs

In November 2014, the S&P Dow Jones Indices and MSCI, two of the largest providers of benchmarks for exchange-traded funds, said real estate would become the eleventh Global Industry Classification Standard (GICS) sector in August 2016.

And REIT Makes 11

Although that announcement is now a year-and-a-half old, there is still expected to be some benefit for real estate stocks and exchange-traded funds when real state officially becomes its own sector on August 31. That is good news for ETFs such as the Vanguard REIT Index Fund VNQ, the largest real estate ETF, and rivals such as the iShares Dow Jones US Real Estate (ETF) IYR and the Schwab Dow Jones U.S. REIT Index ETF (Schwab Strategic Trust SCHR).

Related Link: Another Fed Test For Utilities ETFs

The shift of real estate stocks to separate sector status is expected to prompt massive buying from managers of actively managed mutual, which perhaps ironically, will benefit the biggest thorns in their sides: passively managed ETFs.

Is There Still Upside To Come?

“Almost 40 percent of large-cap core fund managers has no exposure to Real Estate stocks within their portfolios, which inflates the overall industry underweight [...] 44 percent of each large-cap growth and large-cap value funds and 31 percent of multi-cap core funds also held no Real Estate positions,” according to excerpts of a Goldman Sachs note posted by Barron's. “We expect funds with no Real Estate exposure will drive the majority of flows into Real Estate stocks once the new Real Estate sector is formed. Funds with no exposure may be more inclined to add Real Estate stocks to their portfolios and take a directional view on the newly formed Real Estate sector vs. their benchmark.”

A Few Names To Watch

Barron's adds the REIT buying could be as high as $19 billion when real estate becomes its own sector at the end of August. That is welcome news for ETFs like VNQ and IYR, which are up an average of 5 percent year-to-date.

REITs and the corresponding ETFs are sensitive to interest rates and with the Federal Reserve eyeing a June rate hike, these funds could be pinched in the near-term. However, investors may be able to overlook one small rate hike when they know massive buying of REIT ETFs' components is coming in August.

“According to Howard Silverblatt, an index analyst with S&P Dow Jones Indices, on a pro-forma basis as of March 8, the elevation of REITs within the S&P 500 index would create a sector sporting an above-average dividend yield of 3.5 percent, third behind telecom services and utilities. Meanwhile the financials sector's yield of 2.3 percent would decline to 2.0 percent,” said S&P Capital IQ in a note out earlier this year.