Real estate’s new sector status uncovers key differences between REITs and financial stocks
As of Sept. 1, S&P and MSCI have established real estate as the 11th sector within the Global Industry Classification Standard (GICS) by separating it from the financials sector. Under this arrangement, real estate investment trusts (REITs) are now classified as follows:
- Mortgage REITs are a sub-industry of the financials sector.
- All other REITs are classified as equity REITs and are classified as an industry under the real estate sector.
This move is expected to increase investor focus on the new real estate sector, which has offered unique return characteristics. As an example, REITs typically pay an above-market dividend yield. As of Aug. 31, 2016, the S&P 500 Real Estate Investment Trusts REITS Industry Index offered a dividend yield of 3.91%, compared with 2.13% for the S&P 500 Index.1
Financial stocks and REITs tend to behave differently
Separating real estate from financials make sense when you consider how they relate to each other. The following correlation matrix illustrates the relationship between different segments of the financials sector relative to REITs, the VIX Index (a near-term indicator of market volatility), the 10-year Treasury yield, the S&P 500 Index, and the utility sector over a roughly eight-year period.
Judging from these correlations, there are key differences between financial shares and real estate investment trusts.
- Diversified financial stocks (S&P 500 Diversified Financials Industry Group Index) and insurance stocks (S&P 500 Insurance Select Industry Index) displayed the highest correlations to the 10-year Treasury yield; both like rising rates. By contrast, equity REITs (S&P 500 Real Estate Investment Trusts REITs Industry Index) displayed significantly lower correlation to the 10-year Treasury yield, while mortgage REITs (Dow Jones U.S. Mortgage REITs Index) displayed limited correlation to the 10-year Treasury yield.
- Insurance stocks were most negatively correlated to market volatility, as represented by VIX, while mortgage REITs and equity REITs displayed the least negative correlation to VIX. This suggests that REITs could have a relatively defensive tilt compared with stocks in the financials sector. Typically, VIX rises during periods of uncertainty and weak equity prices.
- Equity REITs had lower correlation to the S&P 500 Index than broader financials, such as banks, insurance companies and diversified financials. Mortgage REITs displayed the lowest correlation to the S&P 500 Index.
- Banks (S&P 500 Banks Index) and diversified financials displayed a strong positive correlation to each other. In fact, they look related, from my viewpoint.
- The relationship between equity REITs and utility stocks (S&P 500 Utilities Sector Index) is stronger than the relationship between REITs and other segments of the financials sector, such as banks, diversified financials, and insurance companies.
Clearly, there are significant differences between REITs and other segments of the financials sector, which may help explain some of the logic behind separating real estate from financials.
Stay tuned for part 2 of this series.
Correlation is the degree to which two investments have historically moved in relation to each other.
Dividend yield is the amount of dividends paid over the past year divided by a company’s share price.
Price ratio compares the price of one security (or basket or securities) to another security (or basket of securities). In this case, the prices of two indexes are compared.
A real estate investment trust (REIT) is a closed-end investment company that owns income-producing real estate.
Relative performance refers to the performance of an asset or investment relative to another asset, investment or benchmark.
The consumer price index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.
The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options
Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.
The Dow Jones U.S. Mortgage REITs Index comprises real estate investment trusts, corporations or listed property trusts that are directly involved in lending money to real estate owners.
The S&P 500 Real Estate Investment Trusts REITS Industry Index defines and measures the investable universe of publicly traded real estate investment trusts domiciled in the United States.
The S&P 500 Utilities Sector Index is an unmanaged index considered representative of the utilities market.
The S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
The S&P Banks Index comprises stocks in the S&P Total Market Index that are classified in the GICS asset management & custody banks, diversified banks, regional banks, other diversified financial services and thrifts & mortgage finance sub-industries.
The S&P Insurance Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS insurance brokers, life & health insurance, multi-line insurance, property and casualty insurance and reinsurance sub-industries.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The S&P 500 Diversified Financials Industry Group Index is a capitalization-weighted index that is considered representative of the diversified financials industry group.
An investor cannot invest directly in an index.
Past performance is no guarantee of future results.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
Investments focused in a particular industry or sector are subject to greater risk and are more greatly impacted by market volatility, than more diversified investments.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 50,000, 75,000, 100,000 or 200,000 Shares.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (Invesco PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.
©2016 Invesco Ltd. All rights reserved.