In the next week or so, you will likely see reports indicating that $3.6 billion flowed into Real Estate ETFs in September. However, that figure is misleading, because actual net inflows into the underlying REITs was only about $0.6 billion. The other $3.0 billion is the result of an accounting gimmick.

On September 16, major index and ETF providers implemented structural changes to align themselves with the recent change to the Global Securities Classification Standard (“GICS”), which promoted Real Estate to sector status by extracting it from the Financials sector. The change did not create any new REITs or add REITs to the GICS system. Instead, it merely pulled the existing equity REITs from the Financials bucket and placed them in their own Real Estate bucket.

Given this scenario, one would expect the combined assets of all Financials and Real Estate ETFs to have similar levels on August 31 and September 30. There is an expectation for a reduction of assets in Financials ETFs due to the extraction of the REITs, but those same assets were transferred into Real Estate ETFs and should offset this. Granted, there are also market valuation changes and differences in industry-level asset flows that come into play, and it turns out that market declines were September’s largest contributors.

On August 31, there was $34.5 billion allocated to Financials ETFs and $65.8 billion in Real Estate ETFs, for a combined total of $100.3 billion. During September, assets in Financials declined by $5.0 billion, and Real Estate ETFs increased $2.3 billion, resulting in a combined loss of $2.7 billion. Market setbacks account for about $2.5 billion of the decline, suggesting about $0.2 billion of net outflows.

One obvious peculiarity in the September flows that I noticed is the asset-flow accounting methodology applied to the Financial Select Sector SPDR (XLF) when it spun off its REIT holdings. It accomplished this by issuing a special dividend consisting of shares of the Real Estate Select Sector SPDR (XLRE). Although about $3 billion in assets came out of XLF in this manner, none of it was logged as an outflow. Instead, the nearly 665 million shares of XLF saw the value of their shares reduced by $4.44 each. Since the share count wasn’t reduced, there were technically no outflows as a direct result of this stock dividend.

The same $3 billion that came out of XLF went directly into XLRE. However, XLRE reported it as an inflow because it had to create additional shares that were issued as dividends. Even though there was not any change in the combined assets as a result of this dividend, the industry flow reports show about $3 billion of new inflows that didn’t really occur.

The September “reported” asset flows are $0.87 billion in outflows for Financials ETFs and $3.65 billion of inflows for Real Estate ETFs, resulting in a net inflow of $2.78 billion. However, by properly adjusting for the $3 billion that moved from XLF to XLRE, the net inflow turns into a net outflow of $0.22 billion.

Total assets across the entire U.S. ETF and ETN industry increased 0.7% to $2.4 trillion in September. Total inflows were reported as $17.8 billion, but due to the special dividend anomaly discussed above, the adjusted figure is about $14.8 billion. The year-to-date inflow figure now stands at $165 billion.