New S&P 500 REIT stock rules raise questions for investors

Real estate shares will no longer be grouped with financial firms

TRD New York /
Jul.July 11, 2016 07:00 AM

A change in the way real estate investment trusts are grouped in the S&P 500 and MSCI stock indices, scheduled for Sept. 16, could impact investors in a big way.

REIT stocks will soon be a separate official stock category – one of 11 in the S&P 500 index. Currently they are grouped with financial firms, where they make up around 20 percent of stocks (a market value of $609B as of June 30). The change may sound trivial, but could become an issue for investors in so-called exchange traded funds – tradable investment funds that track the performance of a certain basket of stocks.

Some exchange traded funds that track financial stocks may choose to sell REIT shares to comply with the new classifications, the Wall Street Journal reports. That could leave investors in those funds with a possible surprise tax bill on sales proceeds and with the possibility that the remaining basket of stocks is less attractive. Since 2008, REIT stock have averaged 9.8 percent annual returns, compared to 3.5 percent returns for bank stocks, according to Morningstar.

“The average investor has no idea what’s going on, but this is a big shift,” Robert Gordon, head of stock brokerage Twenty-First Securities, told the Journal.

Some financial-stock funds managed by Vanguard Group, Guggenheim Investments and Fidelity Investments will shed their REIT stocks before the September cutoff. But other fund managers said the change is irrelevant. T. Rowe Price, for example, said its $550 million financial services fund isn’t tied to official categories and won’t shed REIT shares, which make up 4 percent of its stock pool. [WSJ]Konrad Putzier

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