As Sector Separation Looms, Interest Leveraged Real Estate ETF Blooms

As has been widely documented, real estate will become the eleventh GICS sector at the end of this month, separating from financial services.

It's Almost Here, And Analysts Are Ready

It is believed the news, widely known since index providers Standard & Poor's and MSCI made the announcement in 2014, is one of the contributing factors behind investors' enthusiasm for real estate investment trusts and the corresponding exchange-traded funds this year — that, and low interest rates, which are bolstering the case for high-yielding REIT ETFs.

Related Link: Meet This Year's Best Real Estate ETF

“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 last month.

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 in line with the benchmarks they are attempting to beat.

Performance In The Space

Some aggressive traders seem to be seizing upon the theme of active managers being underweight real estate stocks, as activity in the Direxion Daily Real Estate Bull 3X Shares DRN has been increasing in recent days.

DRN attempts to deliver triple the daily returns of the MSCI US REIT Index. The Direxion Daily Real Estate Bear 3X Shares DRV, DRN's bearish counterpart, seeks to deliver triple the daily inverse returns of that index.

“The MSCI US REIT Index includes only REIT securities that are of reasonable size in terms of full and free float adjusted market capitalization to ensure that the performance of the Equity REIT universe can be captured and replicated in actual institutional and retail portfolios of different sizes,” according to Direxion.

For the five days ending August 26, DRN's average volume swelled to more than 71 percent above the trailing 20-day average, the most among all Direxion ETFs, according to issuer data.

The index DRN and DRV track allocates nearly a quarter of its wait to retail REITs and another 17.3 percent to specialized REITs. Residential REITs and healthcare REITs combine for almost 28 percent of the index's weight.

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