Changes set for the S&P500

The S&P500 is undergoing its largest structural change since 1999. For investors, the impact could be significant.

The large cap stock index has long been divided into 10 sectors (a key feature for portfolio construction). From September 1, a new 11th sector (Real Estate) will be added, by being separated out of the broader “Financials” sector.

The immediate impact will be investors reweighting portfolios, recognising that Financials will comprise a much smaller part of the S&P500.  The beneficiary will most likely be the new Real Estate sector (which includes, for example, real estate investment trusts, known as “REITs”). The new Real Estate sector will reduce Financials by about 20% and will make up roughly 3.1% of the S&P500.  Real Estate will be larger than other key sectors such as Materials, Telecoms and Utilities (source - CNBC).

Financials has been the worst-performing sector year to date up just 0.3%.  This would have been significantly worse if REITs were not included – in fact without REITs, Financials would have been down 1.9% (REITs have been up 6.7% YTD).

Interest in REITs has been growing at a staggering pace.  REITs have attracted US$6.8 billion in investor inflows so far in 2016 (the 9th strongest in about 500 ETF sectors). The fundamental driver of this demand is investors searching for high-yielding assets, something REITs typically deliver on.

Investors in REITs (orange line) have been rewarded with a strong performance this year compared to the S&P500 (blue line).

Figure 1; US REIT returns from Vanguard US REIT ETF (VNQ). Returns to July 29. U.S dollars terms.

Figure 1; US REIT returns from Vanguard US REIT ETF (VNQ). Returns to July 29. U.S dollars terms.

As of 1 September, the S&P500 will include the following 11 sectors, known as “global industry classification standards sectors” (GICS sectors).

1. Energy   2. Materials   3. Industrials   4. Consumer discretionary   5. Consumer staples   6. Healthcare
7. Information technology   8. Telecommunications   9. Utilities   10. Financials   11. Real Estate

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