BLK BlackRock Inc

By Leslie Josephs 

Real-estate stocks are getting their own home in the S&P 500 later this year, a move that could spell trouble in their old neighborhood.

Real estate shares will split off from financials to become the 11th sector of the S&P 500 starting Sept. 19, according to S&P Dow Jones Indices. The change could pose a challenge for funds that focus on financial stocks.

Real-estate investment trusts -- companies that own real estate but whose shares trade on an exchange like a stock -- have been a relative bright spot this year, and some have helped limit declines in the overall financial sector.

Financials are the third-biggest laggard in the S&P 500 this year, after health care and technology stocks, shedding 3.5% in 2016 compared with the broader market's 0.6% gain.

MSCI U.S. REIT index, which tracks real-estate investment trusts, is up 5.8% in 2016. REITs, along with real-estate development and management companies, will be a part of the new S&P 500 real-estate sector. S&P Dow Jones Indices estimated in February that the sector would have a roughly 3% weighting.

The change, which was announced last summer, will mark the first new S&P 500 sector since the current lineup of 10 was launched in 1999, according David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. It will separate real-estate stocks from the financial sector that includes banks and insurers.

REIT shares have attracted investors this year because they are big dividend payers. REITs, which own a variety of properties from single- and multifamily homes to shopping malls, are required to return most of their profits to shareholders and don't have to pay taxes on that amount. Mortgage REITs, meanwhile, will remain in the index's financial sector.

Banks, on the other hand, have been challenged by years of rock-bottom interest rates, which limits how much they can profit on loans. The KBW Nasdaq Bank index, which tracks large commercial U.S. banks, is off 8.4% so far this year.

Investors pulled about $4.8 billion from mutual funds and exchange-traded funds that focus on financial companies this year through the end of March, according to Morningstar Inc., compared with a net $47.8 billion inflow to mutual funds and ETFs broadly in the first three months of the year.

For increasingly popular passive funds, such as ETFs, those that follow S&P indexes would lose the contribution of real estate shares if they are based on the S&P 500's classification system.

State Street Global Advisors in October launched a special real-estate sector ETF (XLRE) and a financial-services ETF in response to the sector split. So far this year, XLRE is up 3.2%. Its older and broader Financial Select Sector SPDR Fund, XLF, which includes both real estate and financial stocks, is off 3.3%.

"We're going to follow the changes in the benchmark," said Rich Powers, head of ETF product management at Vanguard Group, the second-largest ETF provider by assets. "Latitude to depart very materially from that is limited."

BlackRock Inc. says its large financial ETF, the $1.1 billion iShares U.S. Financials ETF, or IYF, follows a different index, so it would be unaffected by the change. That fund is down 2.4% in 2016.

To be sure, the fortunes of the two sectors could change. The selloff in financial stocks have made them cheaper. The sector is trading at 12.4 times the last 12 months' earnings as of Tuesday's close, according to FactSet, making it the least-expensive sector in the S&P 500.

"I think financials [aside from REITs] are the most attractive part of the market," said Peter Stournaras, portfolio manager of the BlackRock Large Cap Series Funds. He said he's staying away from REITs and favoring bank stocks partly because more attractive from a price perspective.

Write to Leslie Josephs at leslie.josephs@wsj.com

(END) Dow Jones Newswires

May 12, 2016 14:46 ET (18:46 GMT)

BlackRock (NYSE:BLK)
Historical Stock Chart
From Mar 2024 to Apr 2024

BlackRock (NYSE:BLK)
Historical Stock Chart
From Apr 2023 to Apr 2024