Freshly carved out of the Financial sector, REITs are the newest Sector in the S&P 500. Sectors – like Financials, Information Technology and Consumer Staples – are the broadest classification of stocks with industry groups and sub-industries further demarcation points. The weighting of financial stocks in the S&P 500 fell by a fifth and REITs now comprise 3.1% of the index giving them a higher weight than materials, telecoms and utilities.
REITs were previously grouped with financials because they shared some qualities with financial stocks. Both Financials and REITs, for instance, have been more volatile than the S&P 500 as a whole with standard deviation of 7% compared to the index’s standard deviation of 4%. But while mortgage REITs will continue to be classified as financial companies, the pairing with equity REITs made less sense as the correlation between eREITs and financial companies is less than the correlation between financials and the rest of the S&P 500.
In fact, REITs have buoyed the performance of Financial stocks with higher price returns and nearly double the dividend payout the last 10 years.
Impending rate hikes by the Fed are a concern for REITs but equity REITs hold commercial properties such as shopping malls and data centers. These firms have been taking advantage of low borrowing costs but increasing rates typically happen in conjunction with a growing economy that offsets the negative impact on them.
Many investors have ignored REITs for years, thinking of them as an alternative security, but the high payout feature and low correlation with the rest of the S&P 500 make REITs an attractive sector for investors demanding income and diversification.