Out On Its Own, Life Is Hard For The Real Estate Sector

In November 2014, the S&P Dow Jones Indices and MSCI, two of the largest providers of benchmarks for exchange-traded funds, said real estate would become the eleventh Global Industry Classification Standard (GICS) sector.

A New Sector: Real Estate

That move became official in September when real estate stocks departed the financial services sector and it benefited the Real Estate Select SPDR XLRE. XLRE was created in advance of real estate becoming its own sector, but struggled to gather assets after launching in October 2015.

That situation was taken care of when State Street Global Advisors decided to pay a special dividend for investors in the Financial Select Sector SPDR XLF, giving those investors shares of XLRE as part of the departure of real estate stocks from XLF. Today, XLRE has more than $2.2 billion in assets under management. 

Still, XLRE and other real estate ETFs have struggled since the sector went out on its own.

Commentary

“Between Sept. 16, 2016, when real estate was carved out of financials as its own GICS sector, and the end of January 2017, the S&P 500 Financials gained 22 percent, leading all 11 sectors. Meanwhile, the S&P 500 Real Estate declined 2 percent — the worst-performing sector,” said S&P Dow Jones Indices in a recent note.

XLRE has also benefited from increased liquidity and tighter spreads, but more importantly, the aforementioned performance data underscore the point that it was time for real estate stocks to stand on their own. After all, the data confirm and XLF and other diversified financial services ETFs that have been soaring since Nov. 9, 2016, would be sporting less gaudy returns if they were still saddled with real estate exposure.

“Why has this happened? In short, financials has been buoyed by prospects for higher interest rates and expectations of reduced regulation from the new Trump administration. On the other hand, rising interest rates have weighed on the real estate sector, which had benefited from the low interest rate environment of the past several years. This divergence is not all that surprising given the fundamental differences between real estate and financials businesses and the macroeconomic drivers that affect these industries,” added S&P Dow Jones Indices.

To start 2017, XLF is up two percent, or more than triple the 0.6 percent gained by XLRE.