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  1. Default REITs Join the S&P 500

    Wednesday, Aug. 31, 2016 marks the first new sector entrant into the Standard & Poor’s 500 Index since 1999. Up until this point, REITs were categorized in the financial sector along with banks and other traditional financial conglomerates, but they now comprise their own standalone sector. This sector will consist of the current group of real estate holdings in the index (except for mortgage REITs, which will remain in the financial sector), and its addition may add more fuel to the fire that has been driving the markets over the past several months.

    The dividend yield of the financial sector in the index will drop as a result of the reorganization. Howard Silverblatt, a senior index analyst for S&P Dow Jones Indices told Investment News that the dividend yield will fall from 2.25% to 2.03%, while the real estate sector will have a yield of 3.16%. The REIT sector will be populated with 28 new issues with a combined market cap of just over $600 billion. Some of these REITs include American Tower (AMT), Boston Properties (BXP), General Growth Properties (GGP) and Public Storage (PSA).

    David Blitzer, the chairman of the S&P Index Committee, wrote that “This is not just rearranging the place cards on the table. The GICS (Global Industry Classification Standard) sectors are widely used to gauge how asset allocations align with markets. With real estate added to the top line of sectors, investors will notice where real estate is and whether they are over or under weighted. Analyses of market movements and fundamentals will focus on real estate the same way they focus on industrials or technology. Based on comments from investors, the real estate industry and others, S&P Dow Jones Indices and MSCI announced in March 2015 that real estate would leave the financial sector and become its own 11th sector in GICS.”

    REITs first became part of the S&P 500 in 2001. Chris Hartung, the portfolio manager on the Lazard US Realty Equity Portfolio (LREOX), said that the addition of this new sector will help to spotlight the importance of REITs to investors. He stated, “It further focuses people on why real estate should be a fundamental part of portfolio allocation. It puts a spotlight on the benefits one gets from real estate.”

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    So out of the financials and into the SPY?

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    It won't have any impact on SPY I don't think. It will impact the Financial Sector ETF which is XLF. I don't totally understand the impact on sector's yet as it makes it a little more confusing. Even though they pulled REIT's out of XLF, the did not include mortage REITS which are part of XLFS yet a 3rd Financials ETF. But I don't think XLF as fully divested itself of the holdings yet. What I see on the SPDR site is XLF still holds all the financial groups and XLFS is the new XLF minus the Real Estate reits (but still including mortage reits) and XLRE has all other reits except mortgage. If it sounds confusing that is because it is confusing. But I think the end result will be that XLFS will have more positive reaction to interest rate hikes due to potential for more profit making on higher interest and XLRE will have more negative response to interest rates hike due to impact on more stress on their leverage.

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    You are confusing me!

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    “XLF will be shedding its current real estate holdings in the form of a special dividend. That special dividend will be paid to XLF shareholders in shares of XLRE, as well as a small cash residual which will solve for the fact that fractional shares in XLRE cannot be issued. The ex-date for XLF will be September 19. Buyers of XLF on that date will not be entitled to the special dividend. On September 19, XLF’s share price will drop by an amount that will approximate the value of the special dividend. The record date for the dividend will be September 21 and the pay date September 22,” according to a recent Morningstar note.

    Following XLF's special dividends, the ETF's weights to banks and insurance providers, groups that already combine for more than half the fund's weight, could rise.

    This is also a shrewd move by SSgA to bolster XLRE, which has managed to accumulate just $13.1 million in assets since coming to market in October. Overall, investors that have been with XLF for a while will essentially hold the same fund, if they opt to hold XLRE as well, just via two ETFs instead of one.

    “Long-term investors that are glad to maintain the exposure they’ve obtained by investing in XLF should be largely indifferent to all of this, as the sum of XLRE and the new-look XLF’s portfolios is identical to 'old' XLF,” added Morningstar."

    So it looks like holders of the ETF XLF will receive holding in XLRE in the form of a dividend payment on September 19th and at that point the real estate holdings in XLF will be dropped and XLF will become XLFS. New investors can by-pass all that mess by just going into XLFS for banks and financial services and XLRE for real estate. At least that is how I am reading it so far. It looks to me like it will take a few months for the actual sector rotation to settle in for those that like to follow the strong and weak sectors. I really like to keep up on this to have a sense of where the economy is sitting in terms of contraction/expansion.

 

 

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