Real Estate Strikes Out on Its Own in the Stock Indexes
nytimes.com
nytimes.com
I'm going to be very interested to see how this reclassification impacts the price of REITs. I'd imagine that capital inflows are going to cause a spike in prices.
Come tax time, lots of investors in Financial Index Fund will be in for the surprise, a larger capital gains unless Financial Index Funds decide to spin off REIT holdings as a separate REIT Index Fund instead of selling REIT holdings.
The new GICS sector could bring some new attention to the sector. This probably will affect small cap more than large cap as the generalists take a broader look at the sector. Many have invested in the large caps for a while just to have some exposure. There have been rumors that general stock managers have underweighted the sector overall as it was a part of their 'financial' bucket, but unlike the traditional financial stocks. However, I wouldn't expect money rushing in or out. If there is any price drop over the next couple weeks I would expect it is due to expectations around the Fed rather than ETFs selling.
With Reits becoming their own asset class, suddenly a lot of money is going to be funneled int this space, mostly without investors even knowing about it.
And of course since Reits will suddenly pull in more money, there are other area's of the market that will have that money pulled from them.
I think the article mentions it, but Reits tend to be counter cyclical to Finance, an area that is a large part of the broad market, as low interest rates help real estate while high interest rates help banks. So people have been watching financial ETF's as one area that may be hit by this change.
Lot's of funds have spent the past 6 months positioning themselves to try and gain from this. Fortunately for most people, this won't be a one time event like an ETF re balancing but it will happen gradually.
Is there an impact on the cost of housing in general?
[1] Edit: Actually some fund providers have found an alternative mechanism: State Street Global Advisors will give shares of their new XLRE fund to XLF holders.
Sure, its easy to show where your thinking went wrong here...
Say there is one passive ETF for the US market and the US market is composed of 2 sectors, Finance and Tech that are balanced at say 60-40 split. There is now a 3rd sector call REITS that is 10 percent of the market.
The ETF now has to transfer from a 60-40 split to a split where 10% is now attributed to REITs. This 10% comes at the expense of other sectors, which is how a passive ETF can move markets.
There have been hedge funds positioning themselves for this move for 6 months now.
Yes, that is correct but I think I'm still failing to help you understand.
Previous to the re-balance the 60% of finance is dominated by old fiance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF.
After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before due to them being their own category and the large fiance companies dominating the fiance category before the split.
The reason why REITS are now bigger is the same as the reason for giving them their own category. Propulsive they were underrepresented due to being lumped in with fiance. Now that they have their own category there is more demand for them, hence they now have a larger percentage of the ETF.
Does this help you understand?
No, they make 10% of the entire ETF. Otherwise your example doesn't make sense.
>After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before
Why?
>due to them being their own category and the large finance companies dominating the finance category before the split.
Who decides that now the weight is larger? (Hint: does the expression "market-cap weighted" ring a bell?)
(Nevermind that, in all likelihood all big S&P500 index funds already own every single fund in the 500; and usually a few more below the top 500 as well.)
But yes, the phrase "strike out on your own" does hang together a bit.