09/21/2016
S&P 500 Sees First New Sector Since the Dot-Com Era

S&P 500 Sees First New Sector Since the Dot-Com Era

The S&P 500 has a new sector for the first time since the tech boom.

The newly formed 11th sector will be comprised of real estate investment trusts (REITs), which make up roughly 3% of the S&P 500’s market capitalization, splitting them off from the financial sector. The financial sector moves from 16% to 13% of the total market cap. The change makes it simpler for investors to track one of the hottest investment types of the past decade.

By the Numbers
According to data from Morningstar Inc., over $62 billion flowed into U.S. real-estate funds from 2001 through the end of 2015. Since 2001, 129 real-estate investment trusts went public, raising over $38 billion in the process, and there are about 240 REITs currently listed on the NYSE and Nasdaq, according to S&P Dow Jones Indices.

Managers who run financial-stock funds might have to sell real-estate shares to stay aligned with the new composition. Funds investing in U.S.-listed real estate firms saw record inflows during the week ending September 14, netting $2.9 billion, according to EPFR Global, potentially signaling what is to come.

An Ever-Changing Marketplace
Sector and industry grouping changes don’t often happen, with new groupings being introduced on just three occasions since 1957 – the year the S&P 500 index was introduced. During the dot-com boom of the late-1990s, there were only four subdivisions of the S&P 500: industrials, transports, financials, and utilities. Tech was not yet represented despite a rapidly changing marketplace. Investors had a newfound interest in which companies were in which indexes and the best methods of gaining broad exposure to particular slices of stocks.

S&P Dow Jones Indices and MSCI, another index provider, were spurred to create a benchmark all investors could look to, working together to devise a set of rules to place certain stocks into certain indexes. After months of discussions, a new Global Industry Classification Standard was completed in 1999, and the S&P 500 was divided into ten sectors in 2001.

Talks to make real estate its own sector have been ongoing for years. The decision was actually made two years ago, but implementation was delayed to give everyone who would be affected, including investors, fund managers, and back-office staff, enough time to prepare.

Members of the committee who made the decision are already discussing another grouping that could need an overhaul: wireless, phone, and cable companies. That change is likely a few years out, with many more debates and discussions needed.

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