Credit: Shutterstock photoDrew Voros
ETF.com Editor-in-Chief
Next month, the financial world will see real estate become its own sector under the Global Industry Classification Standard, which was developed and is maintained by MSCI and Standard & Poor’s.
This means any financial sector ETF that uses an MSCI or S&P index will see real estate companies and REITS removed and folded into a new, separate sector fund. This is the first new sector since GICS was created in 1999. Different ETF providers are handling the transitions differently. There’s no unified approach to splitting the sector and adjusting exposure.
ETFs with indexes that do not follow GICS but use different sector classification standards will not implement any changes.
“This decision is a social commentary that REITs are very grown up,” said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. “Indices reflect the economy, and REITs are now a big part of it.”
In 2001, financials represented about 17.7% of the broader S&P 500, and REITs were a mere 0.6% of financials. Five years later, in 2006, REITs snagged about 5% of financials, which had grown to represent about 21.8% of the market. Today REITs are about 20% of the financials sector, which represents about 15.7% of the total market.
As their own sector, real estate securities will be bigger than both the telecommunications and materials sectors, “and they’ve done well this year,” Silverblatt said.
State Street Global Advisors is making this transition in the hugely popular $16 billion Financial Select Sector SPDR Fund (XLF) through a “special dividend” in the form of shares of the Real Estate Select Sector SPDR Fund (XLRE), according to Dave Mazza, head of ETF and Mutual Fund Research for SSgA.
“Effectively, if you are a holder of XLF, you will end up with the same exposure you currently have, but with two line items: one representing financials as they will be going forward; and the other real estate securities,” Mazza said.
More granularly, at some point prior to Sept. 16 when the indexes rebalance, SSgA will transfer out via the in-kind process the real estate securities, and transfer in the respective amount of shares of XLRE into XLF.
Other ETF providers are taking similar approaches.
One Year Later, China ETFs Normalize
A year ago on Aug. 24, Chinese stocks went into a free fall that also sunk global markets and triggered a flash crash here in the U.S. that pushed the S&P 500 to a two-year low. At the time, it appeared China stocks and China ETFs were in meltdown mode.
But a year later, the Chinese market regained its footing after China’s government implemented measures that included banning short-selling in the country's stock market, halting the trading of more than 1,000 stocks, and cutting interest rates six times in a year.
While investors pulled $2.5 billion from U.S.-listed China ETFs in the aftermath of Aug. 24, performance-wise, those ETFs, along with the Chinese stocks market as a whole, have stabilized. The largest China equity ETF, the $3.85 billion iShares China Large-Cap ETF (FXI), which has bled $1.9 billion in outflows in 12 months, is up 5% in 2016.
However, there has been a divergence between funds that use Hong Kong-listed shares, as FXI does, and funds that use mainland-listed stocks such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)—the largest ETF in the market offering exposure to the 300 largest Chinese companies listed on the Shanghai and Shenzhen exchanges, known as A-shares.
ASHR is down nearly 5.2% in the past year. That’s a 10-percentage-point divergence in returns between this fund and FXI. That’s unsurprising, considering that China’s mainland stock market is one of the worst-performing in the past year. And in some respects, a 5% decline for the year considering what happened in 2015 could be seen as stable performance.
Closures
AccuShares Investment Management announced that it would be closing its four ETFs and that their last day of trading will be Sept. 8.
The funds are as follows:
AccuShares Spot CBOE VIX Up Shares (VXUP)
AccuShares Spot CBOE VIX Down Shares (VXDN)
AccuShares S&P GSCI Crude Oil Excess Return Down Shares (OILD)
AccuShares S&P GSCI Crude Oil Excess Return Up Shares (OILU)
The VIX pair launched in May 2015; each has less than $1 million in assets under management. The oil pair launched in late June, and each fund has gathered more than $2 million. The AccuShares are designed to launch in pairs, with the “Up” shares providing long exposure and the “Down” shares offering the inverse. Each pair of funds moves like a teeter totter.
The closures of the AccuShares ETFs will push the total so far for 2016 to above 75.
Launches
The Principal Group launched its fourth and fifth ETFs, with the new funds delving into niche areas. The Principal Healthcare Innovators Index ETF (BTEC) and the Principal Millennials Index ETF (GENY) will target two very different spaces. The two ETFs come with expense ratios of 0.42% and 0.45%, respectively.
BTEC covers mainly small- and midcap U.S. health care companies that are still in the development phase or that are seeking regulatory approval for their products rather than actively selling and marketing them, the prospectus said. Within the health care space, the fund is focused on the equipment and services, biotechnology, pharmaceuticals and life sciences categories.
GENY is more of a consumer-oriented fund that looks to invest in companies offering products and services that are popular with the millennial generation, which is basically defined as adults born after 1980.
To get the latest ETF news in your inbox,subscribe to our daily ETF newsletter!
Drew Voros can be reached at dvoros@etf.com.
More On ETF.com
The Evolution Of Smart Beta ETFs
Contrarian Sector Rotation Strategies With ETFs
5 Top Performing US Focused Real Estate ETFs
Is Passive Investing Really Worse Than Marxism?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
