A New Look Is Coming For XLF

As has been previously highlighted in this space, the real estate group will become the eleventh S&P 500 sector at the end of August, separating from financial services. That means changes are afoot for the Financial Select Sector SPDR Fund XLF, the largest exchange-traded fund dedicated to the financial services sector. Financials are the second-largest sector weight in the S&P 500 behind technology.

Changes Big And Small(er)

In response to the 2014 decision by index providers MSCI and Standard & Poor's State Street Global Advisors (SSgA), XLF's issuer, launched the Financial Select Sector SPDR Fund XLFS and the Real Estate Select Sector SPDR Fund (The) XLRE as a means of giving investors pure sector exposure when real estate becomes the eleventh GICS sector.

Related Link: Real Estate ETFs Keep Rocking

Even with the creation of those new ETFs, XLF will have to switch indexes after real estate becomes its own GICS group, meaning XLF will be parting with its real estate holdings. As of June 28, real estate investment trusts (REITs) were XLF's second-largest industry weight at 20.5 percent, trailing only banks at 33 percent.

XLF Is Due For A Shakeup

“XLF will be shedding its current real estate holdings in the form of a special dividend. That special dividend will be paid to XLF shareholders in shares of XLRE, as well as a small cash residual which will solve for the fact that fractional shares in XLRE cannot be issued. The ex-date for XLF will be September 19. Buyers of XLF on that date will not be entitled to the special dividend. On September 19, XLF’s share price will drop by an amount that will approximate the value of the special dividend. The record date for the dividend will be September 21 and the pay date September 22,” according to a recent Morningstar note.

Following XLF's special dividends, the ETF's weights to banks and insurance providers, groups that already combine for more than half the fund's weight, could rise.

This is also a shrewd move by SSgA to bolster XLRE, which has managed to accumulate just $13.1 million in assets since coming to market in October. Overall, investors that have been with XLF for a while will essentially hold the same fund, if they opt to hold XLRE as well, just via two ETFs instead of one.

“Long-term investors that are glad to maintain the exposure they’ve obtained by investing in XLF should be largely indifferent to all of this, as the sum of XLRE and the new-look XLF’s portfolios is identical to 'old' XLF,” added Morningstar.

Disclosure: Todd Shriber owns shares of XLF.