The S&P 500 is about to undergo a landmark change, and it could have interesting and important developments for investors.
Since 1999, the index of large-cap stocks has been cut into 10 broad sectors, with the distinctions critical for investors trying to create diversified portfolios. Now, they're getting company — an 11th sector dedicated to real estate that will be taken out of the broader financials group starting Sept. 1.
The move matters on a number of fronts, but in particular because 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.
The REIT carve-out will take about a fifth of the value from financials and comprise about 3.1 percent of the total index, making it larger than the materials, telecom and utilities sectors.
"It's an enormous sector," said Christopher Whalen, senior managing director and head of research at Kroll Bond Rating Agency. "Given the size, I think it's appropriate to break it out. It makes a lot of sense. It should have happened a long time ago."
Indeed, 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. On the S&P 500 alone, REITs have close to $600 billion in market cap.