The Most Annoying Thing About XLF's Real Estate Spinoff

The Financial Select Sector SPDR Fund XLF is a bit leaner on Monday following a transfer of its real estate assets into the Real Estate Select Sector SPDR Fund (The) XLRE. Back in June, the S&P Dow Jones Indices (SPDJI) announced that the XLF’s benchmark, the Financial Select Sector Index, will no longer contain any real estate companies.

The big change took place after the market close on Friday, but XLF investors shouldn’t worry about Monday’s big 17.7 percent drop. XLF investors will be compensated for the value of their lost real estate assets via a special dividend of shares of the XLRE ETF and cash to even out the balance.

For long-term investors, the restructuring simply separates the real estate assets from the financial assets in their portfolios. However, as PreMarket Prep’s Joel Elconin and Dennis Dick discussed on Monday’s show, there is one caveat for XLF investors.

“The one thing I hate about this, being an investor in XLF which is annoying, is that typically those spinoffs are taxable,” Dennis explained.

State Street Global Advisors has said the following regarding the tax implications of the change:

“As of Sept. 9, 2016, the amount of the dividend that will be treated as return of capital is estimated to be between 70% and 80%; the remaining 20%-30% is expected to be taxed as ordinary income.”

Dick added that many long-term XLF investors will now be blindsided by this unexpected tax.

“That’s always annoying to a trader - you held XLF long, and now you get a tax bill in the mail because you ended up getting a distribution of that XLRE shares,” he concluded.