Tahoe-Truckee Market Beat: The new real estate sector
September 6, 2016
The Global Industry Classification Standard, known as GICS, was established in 1999. It was put together by Standard and Poor's and Morgan Stanley Capital International, MSCI. Since it was established 17 years ago, there have been no major changes to the S&P sector classifications until recently.
Effective September 1st, a new sector was added to the 10 existing S&P sectors. The new sector is Real Estate. Formerly, Real Estate was a component of the Financial Sector. Now there are 11 official GICS sectors, 24 industry groups, 68 industries and 157 sub-industries.
There will be two different industries in the Real Estate Sector — Real Estate Management and Development and Equity Real Estate Investment Trusts, known as REITS.
The REIT Industry will have the following sub-industries, Diversified REITS, Industrial REITS, Hotel and Resort REITS, Office REITS, Health Care REITS, Residential REITS, Retail REITS and Specialized REITS.
The Real Estate Management and Development Industry will have four sub-industries, Diversified Real Estate Activities, Real Estate Operating Companies, Real Estate Development and Real Estate Services.
The other 10 sectors, besides the new Real Estate Sector, are Utilities, Telecommunication Services, Information Technology, Financials, Health Care, Consumer Staples, Consumer Discretionary, Industrials, Materials and Energy.
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Real Estate was added as its own sector because of its increasing significance in our growing global economy. Real Estate will now be considered a separate and distinct asset class and should be a part of most portfolios.
Currently, most major pension funds allocate over 20% of their portfolios to alternative investments including real estate. Over $7 trillion is invested in commercial real estate at the present time.
Diversification is very important when building a portfolio. By spreading risk, you can lower your overall risk.
There are several funds that are comprised of investments in the Real Estate Sector, including many exchange traded funds, ETFs. Some of the REITS and REIT funds have very attractive dividend yields and can be a good addition to an income portfolio.
The income yield has provided the majority of the return from most REITS. Capital appreciation has been second to income yield in the total return calculation.
When I report on S&P earnings next quarter, I'll provide updates on how the earnings go for the new Real Estate Sector. This will be a nice change to the GICS system.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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