After almost two decades, the S&P 500 is adding an 11th sector. Announced in 2014, Real Estate is finally in its own sector. Why create a new sector? And is this a big deal or not?
Market Opens New Week With A New Sector
Market sectors being added to indexes are also an “index” of the times. For example, during the dot com bubble of the late 1990s, there were four sectors in the S&P 500: Utilities, Financials, Industrials, and Transports. Technology, which was the hot commodity of the time, didn’t show up anywhere in the S&P.
It wasn’t until 2001, when the S&P was divided into 10 sectors, that Information Technology became the biggest sector in the index, as it remains today. Stocks are split into sectors to make it easy for investors to find and invest in those stocks. Now that real estate is elevated to its own sector, investors don’t have to work to figure out where to look for certain stocks.
And investors have been looking. More than a net $62 billion has flowed into U.S. real-estate funds since 2001 through the end of 2015, according to Morningstar Inc. data.
So why is this important?
Investors can trade an index as an Exchange-Traded Fund (ETF), which represents a basket of stocks, but traded as one on an exchange. Sector ETFs work the same way. Until now, Real Estate has been grouped into the Financials sector. As a whole, Financials are up just 0.3 percent this year, making it the worst-performing market sector. Without Real Estate, financials would be down about 1.9 percent this year.
Many portfolio managers will now be scrambling to “balance” themselves as far as diversity goes. With Real Estate no longer under Financials, many portfolio managers will have to sell off Real Estate as well as buy under-performing Financial ETFs to make sure they’re not overcommitted to any one particular sector.
While another new grouping is still years away, investors can expect wireless, phone and cable companies to split off into a new sector in the near future. For the present, investors should closely follow the new sector with eager anticipation.
Real Estate is booming, and the new Real Estate Sector ETF (XLRE) will follow.
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