Real estate stocks have distinguished themselves from financials to the extent that the former group now has its own Global Industry Classification Standard (GICS) sector. A fair amount of publicity accompanied this change in August, and it catalyzed a white paper from Principal Global Investors on the REIT Breakout.

The new GICS Sector, the 11^th, called simply “Real Estate,” is divided into two industries: REITs and Real Estate Management and Development. But mortgage REITs, because they don’t own real estate but simply lend on properties, remain in the financial sector.

MSCI implemented the classification change at the end of August. Dow Jones waited until mid-September, its planned quarterly rebalance date, to make the change. Russell’s indexes don’t reflect the change since they don’t use the GICS at any rate.

In the United States alone, the total equity market capitalization for REITs has gone above $1 trillion. On July the average daily trading volume was above $7 billion. These two numbers give an idea of the reasons for the change.

What impact?

What was the impact of the existence of a new GICS sector? The Principal white paper looked at the consequences with the benefit via foresight; you and I can employ some hindsight.

Principal observed, first, that there would be no impact for passive equity funds that track broad indexes. The weight of the REITs within these funds had not changed, so no re-balancing purchases would be required. Likewise, there would be no change for dedicated REIT-only sector funds. They were benchmarked to REIT sector indexes, regardless of the GICS.

Active equity fund managers might have needed to pay heed to GICS, though. Many were underweight REITs, and some of those stood to neutral weight the new sector. This could have made them a “significant source of money” flowing into REIT stocks. Some may have been required to adopt a GICS sector-neutral approach, in which case there stood to be some forced buying.

On the Other Hand….

On the other hand, Principal suspected that the likely flow of money into REITs for this reason shouldn’t be overestimated: it would not be “large or immediate.” Those who had to do forced buying would be “a small minority” among the “potential buyer pool.” Active managers who did have a choice had not been waiting for GICS to instruct them on the importance of REIT, they already have learned to view REITs distinctly from other financials, and didn’t intend to manage portfolios in a new manner due to a merely formal change.

Financial sector mutual funds or ETFs made for a “relatively small group of funds “ that tracked and of course still track the financial sectors of MSCI or S&P Dow Jones. Real estate stocks are about one-fifth of their holdings. Principal estimated that this group in aggregate held $5 billion in real estate stocks. That excludes any separately managed accounts. These funds, like Vanguard Financials ETF (

Price Chart

Stock Information