> Seeing real estate as a stand-alone sector in an index could also drive more money to REITs.
I'm going to be very interested to see how this reclassification impacts the price of REITs. I'd imagine that capital inflows are going to cause a spike in prices.
In the short term, capital outflow from selling of REITs by Financial Index Funds will depress the REIT prices. Financial Index Funds have much more capital invested in them than that in the REIT index Funds. Any REIT selling by Financial Index Funds will have bigger impact than any REIT purchasing by REIT Index Funds.
Come tax time, lots of investors in Financial Index Fund will be in for the surprise, a larger capital gains unless Financial Index Funds decide to spin off REIT holdings as a separate REIT Index Fund instead of selling REIT holdings.
Real estate professional here, investing in listed and non-listed. Few ETFs will have to adapt to this change, but those that will have had a long time to figure out the most tax efficient way of doing so. While they are passive managers, they still have incentives to help their investors with structure.
The new GICS sector could bring some new attention to the sector. This probably will affect small cap more than large cap as the generalists take a broader look at the sector. Many have invested in the large caps for a while just to have some exposure. There have been rumors that general stock managers have underweighted the sector overall as it was a part of their 'financial' bucket, but unlike the traditional financial stocks. However, I wouldn't expect money rushing in or out. If there is any price drop over the next couple weeks I would expect it is due to expectations around the Fed rather than ETFs selling.
In a world where so many people do passive ETF index based investing this has the ability to move markets.
With Reits becoming their own asset class, suddenly a lot of money is going to be funneled int this space, mostly without investors even knowing about it.
And of course since Reits will suddenly pull in more money, there are other area's of the market that will have that money pulled from them.
I think the article mentions it, but Reits tend to be counter cyclical to Finance, an area that is a large part of the broad market, as low interest rates help real estate while high interest rates help banks. So people have been watching financial ETF's as one area that may be hit by this change.
Lot's of funds have spent the past 6 months positioning themselves to try and gain from this. Fortunately for most people, this won't be a one time event like an ETF re balancing but it will happen gradually.
Actually if this reclassification moves markets it will not be to due to passive investing. The market will be the same, only the allocation of companies to sectors changes. A truly passive investor don't change his holdings at all, he's already invested in REITs. Of course [1] ETFs that track the financial sector only will sell the REITs (and I'm not sure why do you say this is not a one time event), but its debatable if the ETFs that are used for sector/industry/theme allocation qualify as "passive investing." There will also be consequences for active managers, that may be benchmarked to a particular sector or for some reason might be induced to increase/reduce exposure to REITs (either hard constraints or, as the article says, "they have to close that gap or answer questions.”).
[1] Edit: Actually some fund providers have found an alternative mechanism: State Street Global Advisors will give shares of their new XLRE fund to XLF holders.
> Actually if this reclassification moves markets it will not be to due to passive investing.
Sure, its easy to show where your thinking went wrong here...
Say there is one passive ETF for the US market and the US market is composed of 2 sectors, Finance and Tech that are balanced at say 60-40 split. There is now a 3rd sector call REITS that is 10 percent of the market.
The ETF now has to transfer from a 60-40 split to a split where 10% is now attributed to REITs. This 10% comes at the expense of other sectors, which is how a passive ETF can move markets.
There have been hedge funds positioning themselves for this move for 6 months now.
> The 10% attributed to REITs is coming directly from the 60% in Finance.
Yes, that is correct but I think I'm still failing to help you understand.
Previous to the re-balance the 60% of finance is dominated by old fiance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF.
After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before due to them being their own category and the large fiance companies dominating the fiance category before the split.
The reason why REITS are now bigger is the same as the reason for giving them their own category. Propulsive they were underrepresented due to being lumped in with fiance. Now that they have their own category there is more demand for them, hence they now have a larger percentage of the ETF.
>Previous to the re-balance the 60% of finance is dominated by old finance companies at the expense of REITS such that REITS only make up say 3% of the entire ETF
No, they make 10% of the entire ETF. Otherwise your example doesn't make sense.
>After the re-balance REIT's are now a much larger portion of the ETF, 10%, than they were before
Why?
>due to them being their own category and the large finance companies dominating the finance category before the split.
Who decides that now the weight is larger? (Hint: does the expression "market-cap weighted" ring a bell?)
There's also the effect where, say, an S&P 500 Index Fund is replicating the index not by purely buying each individual component but by replicating the return of the constituent sectors of the index. In this way, it is possible(likely maybe even, since traditional finance companies have such a high market cap) that an index fund could have been tracking the index by buying major constituents like banks and completely neglecting REITs, and been ok. Now that they are in a separate sector that is not possible to do, even considering market-cap weighting, so some money will necessarily be re-balanced into the REITs and away from other sectors.
That's not how it works. If they were too small to be sampled before, they're still too small. Just because they have a seperate sector now doesn't mean a market-cap total index (or even S&P500) has to buy more of them than before to track the index with minimal error.
(Nevermind that, in all likelihood all big S&P500 index funds already own every single fund in the 500; and usually a few more below the top 500 as well.)
Depends on the prospectus, most I've looked at that do this sort of thing says they will hold something in every sector to match the returns, but are nonspecific as to the exact composition of how much they aim to hold of each sector to match the overall returns(talking about total-market/return funds btw, S&P 500 was a bad example since a lot of REITs are not in the 500 anyway).
What does this do to the cost of real estate overall? I'm in no way versed on investing, let alone in real estate trusts, but $900B seems like a lot of money.
Is there an impact on the cost of housing in general?
REITs encompass more than just housing (there are large REITs for malls, office buildings, prisons, and even data centers). I would imagine that multifamily and student housing REITs increasing in equity value would allow them to use some of that value to take on more projects, thus increasing demand for real estate and increasing the price. But most of the sandboxes that they're playing in aren't individual homes (other than mortgage REITs which represent about 10%, not sure how they would be impacted, I'm not a REIT expert).
