The Real Estate Sector Comes of Age in the Stock Indexes

The Real Estate Sector Comes of Age in the Stock Indexes

By Roger Ward, CFP®, CPA/PFS

Background

In 1999, the providers of index construction – Standard & Poor’s and MSCI – created ten categories of investment sectors:

  1. Energy
  2. Materials
  3. Industrial
  4. Consumer Discretionary
  5. Consumer Staples
  6. Health Care
  7. Financials
  8. Information Technology
  9. Telecommunications Services
  10. Utilities

These categories classify the stocks in various indexes and compare the performance related to these different sectors.

What Has Happened?

As of September 1, the index providers have created an 11th sector, Real Estate. Now, dedicated real estate securities, previously classified in the Financials sector, will populate this new sector. Why the change? Because the real estate industry has grown significantly in size from the index’s original construction in 1999 and performs dramatically different from the other sub-sectors, such as banking.

What is the Impact?

For investors with a dedicated Financials sector fund, you will notice an impact as portfolio managers shift fund allocations to match the new index. Investors may also have tax implications from these changes. For holders of diversified indexes – like the S&P 500 or the Russell 1000/2000/3000 – you will not feel much of an impact because theses indexes will continue to hold real estate securities whether they are classified as Financials or the new Real Estate sector.

What is the Impact on TrueWealth Portfolios?

Historically, TrueWealth always separates real estate investments from the diversified core holdings. As a result, you will probably feel even less of an impact on your TrueWealth portfolios as those referenced above. While we consider real estate equities as holdings with similar risk characteristics to stocks, we find them to be fundamentally different from those in the broader indexes. This difference is represented in the low .296 correlation between the Dimensional Real Estate Securities fund and the S&P 500 index. Consequently, TrueWealth will not require any updates to our portfolio strategy.

If you have any questions, about this topic, please contact your TrueWealth Advisor.


Roger Ward is a Principal at TrueWealth, LLC, a wealth management firm located in Atlanta, GA. He has more than 25 years of experience helping clients simplify the complications that come with managing wealth. He can be reached at rward@truewealth.com or 404.487.0404.

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