S&P500 Index Changes

The most significant change in two decades performed in the S&P500 index.


The composition of the index S&P500 is changing, real estate sector (REIT) split from the financial sector.

The S&P500 index is considered a leading benchmark in the US stock market and includes the 500 largest US companies by market value.

The S&P500 index historically consists of 10 sectors, the largest of them (after the change) are technology (21%), health (15%), finance (13%) and consumption changes (12%).

Real Estate Income Trust – REIT so far belonged to the financial sector, bur from the beginning of September is defined as a sector in its own, the 11’th sector by number, in the large S&P500 index.

Following this change, the new REIT sector is 3%, the composition of the S&P500 index and the weight of the financial sector declined to approximately 13%, compared with 16% before the change.

We also note that at the same time, in the S&P400 index the financial sector fell by weight from about 25% to about 15%, so now the real estate sector is about 10% of this index, while in the S&P600 index the financial sector fell approximately from 24% to 16%, and the real estate sector is about 16% of this index.

Short introduction to the real estate sector

The real estate is a varied field and includes a number of sub-areas, each characterized by a differently business dynamic.

Although the sector is considered to be defensive and yields biased, quite a few companies also show impressive growth rates in revenues and profits, not only on the background of lower yields but also a result of raising rents of properties they own, in accordance with the growing demands.

Companies included in the new sector have a market value in aggregate of $490 billion, with no representation Sector REIT Index, the S&P500 stands at 28 (25 of which cost a market capitalization of over 10 billion dollars), with representatives of the leading in this sector are: Simon property Group (SPG), a leading real estate company in the field of shopping centers (malls),  Public Storage Corporation (PSA), specializing in the storage of personal belongings, American Tower (AMT) and it’s rival Crown Castle (CCI),which operating wireless tower operators in the US and abroad, the leading REIT  company in logistics and industrial Prologis (PLD), a leading real estate company in the fields of medical centers and nursing homes Welltower (HCN) and more.

Why the change?

The rationale behind the establishment of a new sector in the S&P500 index is the essential difference between a REIT and the financial sector.

The broad financial sector, which includes primarily the shares of banks (major and regional), brokerage firms and funds management companies, considered a cyclical sector, which is a rather strong correlation between economic activity and to higher yields and interest, and tends to outperform in times in which record an increase in the level of risk in the markets.

In contrast, the REIT sector is considered defensive field, and has a negative correlation to yields and interest rates, and tends to outperform in times of declining yields and during periods of economic uncertainty.

Accordingly, the present shares real estate with strong performance since the beginning of this year, due to the decline in yields of the long-term bonds and flow of investors money into channels which provide current yield.It should be noted that the structure of the REIT based on tax-exempt companies, and requires them to distribute over 90% of cash flows for shares (which are taxed at the tax rate applicable to them).

It should be noted that the structure of the REIT based on tax-exempt companies, and requires them to distribute over 90% of cash flows for the shareholders (which are taxed at the tax rate applicable to them).

Where to? Real estate sector

A distinction should be made between real estate offices, retail, health care, housing, and storage.

We will focus on two outstanding segments of this sector:

the US office market tends to track the performance of the economy with a certain delay.

US economic conditions, especially in the employment rate, play an important role in determining the competitive dynamics.

The recovery in the US labor market, allowing the office vacancy rate to stand at 15.5%, a lower level than that recorded in previous years (17%).

It is expected that the office vacancy rate will continue to shrink, with the support of a decrease new offices in urban markets with low supply.

In addition, the average rent is expected to rise by 3% to 5% in 2016 as a whole, the differences in growth between regions and different asset classes.

According to estimates, the value of assets in this segment reached a low point in 2011. Since then it has begun the journey of a measured recovery, mainly due to increased interest from investors.

Accordingly, real estate funds that serve urban markets such as New York, are expected to lead the recovery due to positive employment trends and priorities in these places.

REITs serving clients in the technology, healthcare, and energy, especially in areas as San Francisco, Boston, and Houston, are also expected to present relatively positive performance in the current environment.

Class A properties, benefiting from the highest rents are expected to enjoy a strong demand, as a result of tenants aspiration to establish rents before a stronger recovery in the market. Suburban areas, which their entry barriers are low Comparatively, are expected to continue to be challenging later in 2016.

Retail REIT Sector (malls regional, factory outlets and community centers), is expected to continue to benefit from the improvement in the US economy, with expectations of an increase in wages of employees is expected to contribute to retail sales, especially in states such as New York and San Francisco.

In addition, the arrival of the US economy into a “full employment” and increase in the number of employees support this trend in other areas and are expected to contribute to companies revenues in this sub-sector.

on the other hand, remains a risk of a change in monetary policy in the US, which could weigh on by an increase in financing costs combined with an injury in disposable income due to the strengthening of the dollar.

New sectors profit forecasts:

According to Bloomberg consensus forecasts of analysts, the real estate companies in the new index in the S&P500 are expected to show growth of more than 9% profitability in the next 12 months, compared to the same period last year.

The “shrunken” financial sector is expected to show growth of over 13% in its profitability in the coming year.

It should be noted that the decline in bond yields since the beginning of the year, combined with the improved state of the US real estate market resulted in the funds that invest in shares of the REIT yield relatively high returns so far this year.

So, What to do?

It is recommended to balance the investment mix by combining cyclical industries stocks, which are expected to benefit from growth, such as technology (QQQ) and Consumer Discretionary (XLY), alongside stocks from defensive industries like communication (VOX)  health (XLV), and basic consumption (XLP).

In order to reduce risk, and in view of the lessened magnitude and pace of increases in the US interest rate, exposure to value companies characterized by strong balance sheets, low but stable growth, and relatively low beta can be added.

In Europe (XSX6 GY) the priority is for the companies with high exposure to markets outside of Europe. Also, there is a priority to the major stock indexes over the medium and small-cap indices.


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