Welcoming The New Addition To The S&P 500: Real Estate

| About: Vanguard REIT (VNQ)

Summary

REIT investment has soared in the last 30 years.

Builders rush to meet demand.

…But homeownership is falling.

Welcoming the New Addition to the S&P 500: Real Estate

In case you haven't noticed, the S&P 500 Index is looking a little different these days. Once a subindustry of the financials sector, real estate now has its own zip code in the universe of blue chip stocks. It's the first time since 1999 that such a change has been made to the S&P's composition.

The new sector has a weighting of nearly 3 percent, all of it taken out of financials.

As I told CNBC Asia's Bernie Lo recently, I think real estate's promotion will attract more institutional and individual investors to the space. It tells them this is no longer a niche market but one with a distinct and significant presence, with its own unique business drivers.

This has been a long time coming, to be perfectly honest. Ever since the housing and financial crisis, real estate investment trusts (REITs) have been pulling in some serious cash as more become available for trading on the New York Stock Exchange and elsewhere. Altogether, REITs currently have a market cap of over $1 trillion, according to REIT.com.

With investors on the hunt for yield, it's not hard to see why. As of August 31, the FTSE NAREIT All Equity REITs Index yielded an average of 3.61 percent, compared to the S&P 500's 2.11 percent. During 2015, stock exchange-listed REITs paid out a whopping $46.5 billion in dividends.

Builders Rush to Meet Demand

Looking just at the residential housing market, business is definitely booming. With 30-year mortgage rates at below 3.5 percent, the market is scorching hot in many parts of the U.S. -- so much so, some builders are reporting a shortage in construction workers to meet demand.

New construction starts rose to 1.2 million in July, beating analysts' forecasts and suggesting the U.S. housing market appears to have finally made a full recovery eight years following the recession, with Bloomberg calling this the "strongest home sales since the start of the economic expansion."

…But Homeownership Is Falling

Trouble could be brewing, however. As I shared with you last month, millennials just aren't buying homes at the same rate we've historically seen from 18- to 34-year-olds. There are many theories as to why this is, from millennials delaying starting families to focus on careers, to a loss of trust in homeownership as a reliable investment or even as an institution, to a preference to rent. This trend has contributed to the lowest U.S. homeownership rate in five decades.

But how can this be? How could there be both massive housing demand and yet declining homeownership?

One answer might lie in population growth. Simply put, there are more of us living in the U.S. than ever before, which translates into more renting and more buying. And with single-person households on the rise every year, a need for additional housing units has become a priority. Whereas one unit would have served a married couple only a few years ago, now two are needed.

Whether you believe this or not, it seems reasonable to expect the new real estate sector to attract assets to the space, as more mutual funds will add to their exposure to better reflect the S&P 500. If anything, it will help investors monitor and track this important segment of the market.

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There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

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This commentary should not be considered a solicitation or offering of any investment product.

Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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