In less than a week, real estate will break away from financials to become the 11th and newest sector under the Global Industry Classification Standard (GICS). The move elevates real estate to a prestigious position within the stock market, though its impact on the way people invest may be limited.
Known for their hefty dividends and growth potential, real estate stocks―and in particular, real estate investment trusts (REITs)―have always been attractive to income-orientated investors, and that will remain the case.
Technically, the new real estate sector under GICS will consist of two industry groups: equity REITs, and real estate management and development companies (mortgage REITs will remain a part of the financials sector).
However, as it stands now, of the 28 stocks in the S&P 500 that will be in the real estate sector, 27 are REITs. In the S&P Midcap 400, 37 of 39 real estate stocks will be REITs, and in the S&P SmallCap 600, 28 of 31 real estate stocks will be REITs.
In other words, the new real estate sector will be so overwhelmingly REITs that it is essentially a REIT sector.
Real Estate Sector Is REITs
For ETF investors, that means buying a U.S. real estate sector ETF is little different than buying a REIT ETF―both funds will be predominantly REITs.
That said, there are many differences between the various U.S. real estate ETFs and REIT ETFs out there. This year's top U.S. real estate ETF, for example, is up 29.3%, while the bottom-performing ETF in the segment is up only 7.7%.
Not all of these ETFs adhere to the GICS, and some don't even track an index. The No. 1 performer, the PowerShares KBW Premium Yield Equity REIT Portfolio (KBWY), holds small and midcap REITs, and weights them by dividend yields.
The result is an ETF that currently has a juicy 6.9% 30-day SEC yield.
Likewise, the No. 2 performer, the IQ Real Estate Small Cap ETF (ROOF), also focuses on smaller-cap companies by holding REITs in the bottom 10% of the market capitalization of the industry. ROOF currently has a SEC yield of 4.6% and is up 19.2% year-to-date.