XLF's Solution To Real Estate's Looming Sector Status

As has been widely documented, real estate stocks will become their own sector, separating from the financial services group, at the end of August.

Initially, that announcement made in 2014, was thought to have a looming impact on the Financial Select Sector SPDR Fund XLF. XLF, the largest financial services exchange-traded fund, has a significant weight to real estate stocks. In fact, that group represents XLF's second-largest sector allocation.

Pure Sector Exposure

State Street Global Advisors (SSgA), XLF's issuer, created the Financial Select Sector SPDR Fund XLFS and the Real Estate Select Sector SPDR Fund (The) XLRE as a means of giving investors pure sector exposure when real estate becomes the eleventh GICS sector. That also means XLF will not be parting with its real estate holdings.

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“State Street Global Advisors (SSGA), the largest provider of US sector ETFs with $93.9 billion in assets across 11 ETFs at the end of May, plans to pay out a sizable special dividend to its shareholders in mid-September. Following implementation of an upcoming index change, investors in the firm's highly popular XLF will receive shares in the much smaller and less liquid Real Estate Select Sector SPDR,” said S&P Capital IQ in a note out Wednesday.

XLF Shareholders And Asset Influx

The influx of new assets via XLF shareholders should be a boon for XLRE. Consider the following: XLRE debuted in the fourth quarter of 2015 and today has just under $13 million in assets under management. For its part, XLF is a $16.8 billion fund and one of the largest sector ETFs of any variety.

Rather than sell the XLF's real estate holdings, which could trigger a taxable event for the ETF's investors “SSgA will pay a special dividend to XLF shareholders, in the form of XLRE. The dividend record date is September 21 and the dividend will be paid on September 22. Based on current assets and weightings, this would be equal to $3.12 billion of new assets in XLRE,” said S&P Capital IQ.

Dividends

Following XLF's special dividends, the ETF's weights to banks and insurance providers, groups that already combine for more than half the fund's weight, could rise. Simon Property Group Inc SPG is the only real estate stock currently in XLF's top 10 holdings.

“The sizable new client base in XLRE will provide this ETF with greater liquidity and enable all of its shareholders to transact in a lower cost way. However, we think it is likely that some of XLF shareholders will not want to maintain an equal weighting in REITs through an ETF, which should create some enhanced trading activity in large-cap REITs,” added S&P Capital IQ.

Disclosure: Todd Shriber owns shares of XLF.