REITs Rising Up
by David Blitzer, Chairman of the Index Committee, S&P Dow Jones Indices
REITs used to be seen as step-children â unusual securities with special tax treatments and slightly different accounting. Some investors werenât sure if REITs were really common stocks. Then in 2002 for the first time a REIT was added to the S&P 500. That recognition attracted attention and investors began to see REITs as a bit more main stream. As housing began to boom in the early 2000s, real estate was more widely talked about. While some people were buying second and third homes as investments, a few others were focusing on buying real estate on the stock market with REITs or real estate development companies.
Analysts following REITs use GICS, the Global Industry Classification Standard, and track REITs and real estate as part of the financial sector. Â GICS classifies all publicly traded companies into sectors, industry groups, industries and sub-industries. Â While housing and home ownership went through a boom and a bust, REITs and real estate equities continued to garner increasing attention from investors. In the last few years with very low interest rates, REITs have enjoyed renewed attention due to their attractive dividend yields. Â The chart shows the weights of real estate and non-real estate financials in the S&P 500 and the continuing growth of the soon-to-be new real estate sector in GICS.
Source: S&P Dow Jones Indices, Monthly data
The rise of REITs did not go unnoticed by S&P Dow Jones Indices and MSCI during their annual reviews of the GICS structure.  In recognition of the growing importance of these stocks, a major change is coming: in September real estate development companies and REITs will leave the financial sector behind and become a new 11th sector in GICS. This is the first time since GICS was introduced in 1999 that a new sector is being created. For investors in REITs and real estate developers and for issuers of these securities, this will be a major change. REITs will have more prominence as the weights of REITs in the S&P 500 and other major indices become more widely recognized.
Many portfolio managers and mutual funds compare their equity asset allocation against the current 10 sectors in GICS. When real estate becomes its own sector, these portfolio managers may be busy rebalancing to assure their real estate exposure isnât too far from the benchmark.  The table shows what the S&P 500 would look like were REITs a sector today.
Source: S&P Dow Jones Indices, Data as of June 30, 2016
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