Smart Beta REIT ETF: The New S&P Equal-Weight Real Estate Index

Why Invest In REITs

S&P 500 Companies

• Simon Property Group SPG - $54.5 billion cap, 3.42 percent yield
• Public Storage PSA - $32.3 billion cap, 3.64 percent yield
• Equity Residential EQR - $26.1 billion, 3.08 percent yield
• Health Care REIT HCN - $23.5 billion, 4.92 percent yield
• General Growth Properties GGP - $23.5 billion, 2.56 percent yield
However, Financials make up ~16.2 percent of the S&P 500, and even these large REITs are overshadowed by banking giants, large insurance companies, and a well-known conglomerate run by Warren Buffett.

MSCI REIT Index (RMZ)

A more direct way for investors to get commercial real estate exposure to U.S. equity REITs is to own shares in a REIT ETF. The Vanguard REIT Index Fund VNQ is far and away the largest REIT ETF. It tracks the MSCI REIT Index, which gives investor an exposure to about two-thirds of the publicly listed U.S. equity REITs. However, the RMZ is a market cap weighted index, so investors are gaining more exposure to the biggest REIT names, and much less to exposure to the smaller (and perhaps faster growing), REITs in the VNQ basket of REIT shares. In essence, investors may be inadvertently doubling down on the largest market cap REITs.

Broader CRE Exposure - Equally Weighted

On June 23, McGraw Hill Financial Services MHFI S&P Dow Jones Indices, announced the launch of a new real estate index. The S&P 500 Equal Weight Real Estate Index equally weights the index constituents in the S&P 500 that are currently classified in the Global Industry Classification Standard (GICS) Real Estate Industry Group, excluding Mortgage REITs sub-industry. The Index has been licensed to Guggenheim Investments to serve as the basis for an exchanged traded fund (ETF). Guggenheim pioneered the strategic or smart beta ETF market, with the launch of the first equal weight ETF in April, 2003: Guggenheim S&P 500 Equal Weight ETF RSP.

Why Is This Important?</h3< Investopedia defines Smart beta as a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization based indices. According to the Guggenheim Investments web-site:

• Performance Potential: may help long-term performance by reducing the bias towards the largest individual companies within a particular cap-weighted strategy
• Diversification: may reduce concentration risk often found in cap-weighted indices and provide more balanced exposure across market capitalizations, sectors and other broad risk factors
• Disciplined Rebalancing: systematic reallocation from outperforming to under performing stocks and market segments may provide enhanced risk control and the opportunity to capture long-term equity market performance.

Investor Takeaway

A real estate sector ETF constructed in a balanced fashion, gives investors who own market cap weighted S&P 500 Index funds or ETFs a broader exposure to the commercial real estate asset class, especially the smaller cap names.