REIT ETFs Rising Ahead Of Sector Separation

Underscoring the strength of real estate investment trusts (REITs) this year and the corresponding exchange-traded funds, eight such ETFs hit all-time highs Tuesday.

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.

Ahead Of The Split

REIT ETFs have recently been responding to that announcement. For example, the Vanguard REIT Index Fund VNQ, the largest such ETF, was one of the eight ETFs to touch an all-time high Tuesday and is now up nearly 15 percent year-to-date.

“Many portfolio managers and mutual funds compare their equity asset allocation against the current 10 sectors in GICS. When real estate becomes its own sector, these portfolio managers may be busy rebalancing to assure their real estate exposure isn’t too far from the benchmark,” said S&P Dow Jones Indices in a note out Tuesday.

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In other words, it is fair to say many managers of active mutual funds are currently underweight real estate and when real estate becomes its own sector at the end of August, those managers will be pressed into buying real estate stocks to bring their portfolios inline with the benchmarks they are attempting to beat.

VNQ, An REIT ETF In Focus

Sure, that can be viewed as “forced buying,” but it is buying nonetheless and it is likely to help VNQ and rival real estate ETFs if it is not already doing so.

Investors are not shy about embracing REIT ETFs. For example, VNQ has hauled in $3.6 billion in new assets this year, a total surpassed by just six other ETFs.

“While housing and home ownership went through a boom and a bust, REITs and real estate equities continued to garner increasing attention from investors. In the last few years with very low interest rates, REITs have enjoyed renewed attention due to their attractive dividend yields,” added S&P Dow Jones Indices.

VNQ's trailing 12-month dividend yield is 3.27 percent, or nearly 200 basis points above Tuesday's closing yield on 10-year Treasurys.