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Positive Start for Newest S&P 500 Sector: Real Estate sector
On Monday, September 19th, Real Estate became the S&P 500’s first new sector since 1999, and the 11th sector. and first day indicators were extremely positive. This makes real estate the 11th sector in the S&P 500.
David Blitzer is the chairman of the Index Committee at S&P Dow Jones Indices and said, “This is the first time we have added a new sector and S&P and indexing rival MSCI realized something: More and more people are investing in real estate investment trusts.”
MSCI and S&P Dow Jones Indices LLC announced the creation of the 11th sector under the Global Industry Classification Standard (GICS®) on August 31st, 2016. The S&P Dow Jones Indices previously categorized real estate in with the financial sector, and now the traded real estate sector is made up of 28 real estate development stocks and REITs which are companies that own real estate for development or long-term investment purposes.
‘REIT’ is an acronym for stands for Real Estate Investment Trust. These trusts are securities that trade on the stock exchange like a stock. REITs invest in commercial and residential real estate, and can also invest in mortgages and mortgage backed securities. Most REITs generates their revenue primarily through the rents they collect on the property they own. Companies that qualify as REITs must distribute at least 90% of its taxable income to its shareholders. As such, REITs are outstanding investments for investors seeking dividend income.
The Real Estate Investment Trusts Industry is being renamed to Equity Real Estate Investment Trusts (REITs), and excludes Mortgage REITs. Mortgage REITs are still in the Financials Sector under a newly created Industry and Sub-Industry called Mortgage REITs.
“Real estate being elevated to a separate sector itself is a significant event and it puts real estate on the map.” David Mazza, managing director, head of ETF and Mutual Fund Research for State Street Global Advisors.
The 11th sector debut had a strong showing on its first day against an otherwise flat day for the equity market. More than 3.7 million shares changed hands Monday, many times the fund’s 30-day average of 436,000 shares..
Sentiment over the sector was thought to be boosted after a reading of home-builder confidence surged to match its highest reading in ten years. Some speculated that the surge was due to the first-day spike phenomena.
JJ Kinahan, chief strategist at TD Ameritrade, said he believes that the two forces behind real estate’s first day showings are surprisingly strong homebuilder sentiment and low market expectations based on the belief that the Fed will be raising interest rates this week.
Another economist, Lindsey Piegza, chief economist at Stifel Fixed Income, said the chances of a rate hike this month are “well under 20 percent. She added, “We’re not really looking for the Fed to make any policy change,” she said, noting the recent stream of economic data has been mixed.
“The real estate sector will have more prominence,” explained David Blitzer, managing director and chairman of the index committee of S&P Dow Jones Indices, during an educational S&P webinar.
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