REIT ETFs Ready For Sector Status

Every now and then, there is something to stoke the fires of indexing nerds. This year's fire starter, albeit already known, could be the addition of real estate as the eleventh member of the Global Industry Classification Standard (GICS) group.

Real estate's separation from the financial services sector explains why the Real Estate Select Sector SPDR Fund (The) XLRE came to market late last year, though the popular Financial Select Sector SPDR Fund XLF will maintain its exposure to real estate stocks after the group becomes its own sector.

Finally It's Own Sector

Real estate becoming its own sector is impactful for dividend investors.

“According to Howard Silverblatt, an index analyst with S&P Dow Jones Indices, on a pro-forma basis as of March 8, the elevation of REITs within the S&P 500 index would create a sector sporting an above-average dividend yield of 3.5 percent, third behind telecom services and utilities. Meanwhile the financials sector's yield of 2.3 percent would decline to 2.0 percent,” said S&P Capital IQ in a note out Thursday.

Related Link: REIT ETF Dividends Are Hanging Tough

VNQ

And Others

Real estate investment trusts (REITs) and the corresponding exchange-traded funds faced a trying environment in 2015, as investors anticipated the Federal Reserve's first interest rate increase in nearly a decade, but that did not prevent many investors from searching for yield with REIT ETFs.

However, ETFs such as the Vanguard REIT Index Fund VNQ remain popular with advisors and investors. With above-average yields being one of the primary reasons income investors turn to REITs, it is notable that the asset class is participating in the recent dividend growth seen throughout the broader financial services sector.

VNQ, the largest real estate ETF, has a tempting dividend yield of 4.1 percent, but this giant fund is not the only dividend diva among REIT ETFs.

“Meanwhile, six other REIT focused ETFs have more than $1 billion in assets. However, with the sector carve out of REITs we think asset managers and investors that build portfolios based on the S&P 500 index will focus more on REITs. In our opinion, this should help all ETFs that have exposure to these stocks,” said S&P Capital IQ.

XLRE follows the Real Estate Select Sector Index. Top holdings in the ETF, which debuted in October, include Simon Property Group Inc SPG, American Tower Corp AMT and Public Storage PSA. XLRE charges 0.14 percent year, or two basis points more than VNQ charges.

Disclosure: Todd Shriber owns shares of XLF.