Do you have enough Real Estate exposure?
This Index Change is an excellent excuse to get some higher yield into your portfolio. Lower your risk, increase your diversification and get more income.
GICS Sector Change: Effective August 31, 2016
Standard & Poor's Finance Sector composition will change.
The existing Finance sector will split into two Sectors:
Finance (new) and Real Estate (REITs)
Real estate will become the 11th equity sector within the GICS structure as of the market close on August 31, 2016. It will be elevated from its current position as an industry group within the financials sector.
Portfolios will need to be rebalanced to account for the new group. Financials now will account for a smaller portion of the index, possibly triggering substantial reallocation of resources, while the new sector, and real estate investment trusts in particular, could attract even more investor capital.
REITs have accumulated about $1.1 trillion in total market capitalization, according to the National Association of Real Estate Investment Trusts, and have become an increasingly popular tool in a yield-hungry investment world.
With the removal of real estate, the financials sector may become more volatile, with positive exposure to long-term interest rates.
The new real estate sector is likely to be relatively low beta, with high correlations to defensive sectors such as utilities and health care.
This sector may provide a new lower-beta tool for investors seeking to diversify risk or reduce their exposure to market volatility. Given that many investors have been underweight to REITs, they may want to take a closer look at their exposure to determine whether it is adequate given their investment goals.
Hunting for yield, a lot of investors could be rebalancing in favour of REITs and selling Banks. The Dividend Yield of REITs are very attractive at an avg. 5.7% vs. Financials with an avg. 2.1%. REITs have an excellent diversification potential and a lot of investors are underweight Real Estate. While interest rates are still very low and even negative in some countries, Real Estate is an excellent alternative to bonds and banks.
In this environment, a balanced portfolio should have at least 5% Real Estate exposure. And being underweight banks has been a great idea.
So before you are hunting in Emerging Markets, you can get some local developed Real Estate.