For the first time since 1999, the Standard & Poor’s 500 Index is being reconfigured. The last time was when technology was established as an independent sector.
The current reconstitution of the S&P 500 involves breaking out real estate investment trusts (REITs) from the financial industry group. This is worth paying attention to, given how rarely these sorts of structural changes occur.
Because of the unique characteristics of REITs — most income is passed through tax-free as dividends — it makes sense to categorize REITs separately from banks and brokerages. The big concern to my contrarian eye is the timing. The appeal of REITs is their high dividends in an era of low bond yields. However, these changes are occurring just as the Federal Reserve is on the verge of raising short-term interest rates. The timing of the overhaul could easily prove later to have been problematic.
These changes are occurring after tons of cash have flowed into REITs. According to data compiled by Bloomberg, the REIT sector has attracted $68 billion in exchange-traded-fund assets, and “the group has more money invested in it than any of the other main industry classifications and has attracted the most cash since 2010.” The Wall Street Journal noted that the sector has been:
among the bull market’s best performers . . . The number of publicly traded REITs has also risen. Since 2001, 129 real-estate investment trusts have gone public in the U.S., raising more than $38 billion, according to Dealogic. There are roughly 240 REITs listed on the New York Stock Exchange and the Nasdaq, according to S&P Dow Jones Indices.
The reasons to move REITs out of the financial sector have been true ever since REITs were created in 1960. The S&P 500 could have been altered to distinguish between finance and real estate anytime during the past few decades. Let’s consider a few reasons why this is happening now, and what it might mean.
Any contrarian should note this as a potential problem . . .
Continues here: The Contrarian Signal in the REIT Breakout