The S&P 500 Index, which consists of 500 of the leading publicly traded US companies is widely regarded as the most accurate gauge in determining the performance of large-cap American equities. Since 1999, the index has been divided into ten separate sectors. These distinct sectors allow data to be calculated and published according to the separate industries giving investors valuable information when analysing a particular industry. The index further aids the investor as it provides clear boundaries necessary to distinguish between companies when looking for diversification in an investment.
Previously, publicly traded Real Estate companies, which most notably includes REITs, have always been included in the financial services sector. However, as of the 1st of September 2016, Real Estate officially broke away to form its own “11th sector.”
This is a landmark decision, as REITs now represents 3% of the market capitalisation of the index, putting it ahead of the utilities, telecom and materials sectors. Christopher Whelan MD, at Kroll Bond Rating Agency, thinks the decision was long overdue. He recently commented that “given the size [of the Real Estate sector], I think it's appropriate to break it out. It makes a lot of sense. It should have happened a long time ago" (CNBC, 2016).
The Real Estate’s disengagement from the financial services sector demonstrates the success that REITs have had over the last fifteen years. According to JP Morgan Asset Management, since 2000, REITs have returned an average of 12% per year making it the best performing asset class during this time period. In terms of size, RIETs have accumulated around $1.1 trillion in total market capitalisation with over 50% being represented in the S&P 500 index.
The institution of the new “11th sector” is a significant development for Real Estate market, as it will allow investors to track and compare the performances of the top US REITs. Sebastian Lieblich of the MSCI index designation committee believes that such a move is positive as it liberates Real Estate that up until now was “buried in financials" (Wall Street Journal, 2016). An interesting study by JP Morgan Chase & Co that reflects Real Estate’s “buried” nature suggests, that funds that are looking to reflect the S&P 500 in their investments, only hold about half the amount of REIT stock that they proportionally should.
The new 11th sector could have a significant impact on changing this as fund managers wish to add “weight” to their portfolios. This means that given a fund’s desire to invest with diversification, fund managers will look to increase their holdings in REITs and thereby readdress the balance of their portfolios. Some analysts are predicting that this will boost REITs market capitalization to a volume of $100 billion, as fund managers redirect their investments to the new 11th sector. Whether this is being over optimistic is yet to be seen. However, it is certain that the 11th sector will provide more exposure, data and market interest in REITs, as featured in the S&P 500.