There is a change coming in industry classifications: S&P Dow Jones Indices and MSCI are moving real estate out of the financial sector and into its own sector. The change could have a wide-reaching effect. Among those potentially affected by the reclassification are many funds, portfolio allocation models and sector-rotation strategies.
A bit of background will explain why this change is noteworthy. S&P Dow Jones Indices and MSCI oversee the Global Industry Classification Standard, which is more commonly referred to as the GICS (pronounced “gicks”). It currently comprises 10 sectors, 24 industry groups, 67 industries and 156 sub-industries (excluding the forthcoming creation of the new real estate sector as well as the creation of a copper sub-industry). The GICS determines what sector or industry a particular publicly traded company is considered a part of. It underlies various funds, portfolio allocation models and likely sector-rotation strategies. It also used in various screening tools and trading systems.
It’s not the only industry classification system out there. FTSE (the “ICB”), Morningstar and Thomson Reuters, for instance, have their own proprietary classification systems.
The announced change, which will tentatively take effect after the market’s close on August 31, 2016, will only affect funds, models and strategies based on GICS. For example, the Financial Select Sector SPDR (XLF) will likely lose Simon Property Group (SPG) and American Tower Corp. (AMT). These REITs are currently the ETF’s 12th- and 18th-largest holdings. All historical performance for any fund or asset allocation strategy based on current GICS classification of real estate will need an asterisk placed by it since future returns will be different. All asset allocation and sector rotation models based on GICS will also be altered, potentially affecting how portfolios are allocated.
(Source: AAII)
