From our estimates, specialized REITs (35%), retail REITs (22%), residential REITs (13%) and health care REITs (12%) will be the major components of the new real estate sector.
The Real Estate Select Sector Fund (XLRE) was launched in October 2015 to facilitate the sector split for the Financial Select Sector Fund (XLF). On Sept. 16, XLF will issue a special dividend in the form of XLRE shares, bringing AUM for XLRE to close to $3.75 billion. The new ETF has already seen roughly $3 billion in net inflows this week alone.
The Guggenheim S&P 500 Equal Weight Real Estate ETF (EWRE) is also expected to get a boost in AUM, but of a lesser degree, at about $4 million from the corresponding financials ETF.
Other U.S. REIT ETFs to look out for are the iShares U.S. Real Estate Fund (IYR), the First Trust S&P REIT Index Fund (FRI), the Schwab US REIT ETF (SCHH) and the PowerShares KBW Premium Yield Equity REIT (KBWY).
Financials Also Impacted
The classification of REITs as its own equity sector under the Global Industry Classification Standard, GICS, should have ramifications for the financials sector as well. Looking ahead, as this transition is completed in the next few days, we will be watching for three key factors in this sector: volatility, dividend yield and performance.
For volatility, we expect financials’ volatility will increase, because the low correlation with REITs provided diversification.
REITs have a higher dividend yield (~3.5%) versus 2.4% for the financial sector. So, taking out REITs will lower the dividend yield of financial ETFs to between 1.5 and 2%.
And as far as performance, financials ex-REITs will have a higher weighting of interest-rate-sensitive subsectors such as banks, which will be negatively impacted by rate hike expectations over the next few months.
Banks and financial stocks have more than recovered from the temporary sentiment-driven sell-off led by the “Brexit” uncertainty as well as concerns about the Fed’s policy stance. Yet financial stocks remain undervalued relative to other sectors, based on estimated P/E for this year, price/book and long-term debt/capital.
The $3.7 billion Vanguard Financial Index Fund (VFH) made the jump on Aug. 31 and sold REITs, which had represented about 26.4% of the fund. On Sept. 16, other funds will implement the change as well. However, sector funds tracking Dow Jones and Russell indexes will not change. The table below outlines the expected change for some of the financials ETFs:
|Financials ETF||Fund||AUM ($B)||Rebalance Date||% of REITS Before GICS Change|
|XLF||Financial Select Sector SPDR Fund||$15.90||Sept. 16||20.0|
|VFH||Vanguard Financials Index Fund||$3.60||Aug. 31||26.4|
|IYF||iShares US Financials ETF||$1.50||No change||25.0|
|FXO||First Trust Financials AlphaDex Fund||$0.77||No change||25.0|
|FNCL||Fidelity MSCI Financials Index Fund||$0.24||Aug. 31||27.0|
|RYF||Guggenheim S&P 500 Equal Weight Financials||$0.15||Sept. 16||32.0|
|PSCF||PowerShares S&P Small Cap Financials||$0.20||Sept. 16||31.4|
At the time of writing, Astor Investment Management held IYR and FXO among its universe of ETFs included in its multi-asset portfolios. Astor Investment Management is a fundamentally driven quantitative asset manager that seeks to empower clients with economics-based tools and portfolio solutions to reduce risk and help attain investment goals. Contact Astor at 1-800-899-3230 or [email protected]. For a complete list of relevant disclosures, please click here.