Attention S&P 500 index fund holders – Did you know you indirectly owned real estate?

Attention S&P 500 index fund holders – Did you know you indirectly owned real estate?
Eileen St. Pierre, The Everyday Financial Planner

Last week, it was reported on Nightly Business Report that the S&P 500 ® added a new sector to its infamous index. Equity Real Estate Investment Trusts (REITs) will be taken out of the Financials sector and will now have their own sector. Many investors are probably saying “How does this affect me?” Since the S&P 500 index fund is the most widely-held stock index fund, I thought I would explain what this investment is all about.

What is an Equity REIT?

Equity REITs invest in and own real estate like apartment buildings, department stores, and office space. They make money from rents and the appreciation of the underlying real estate’s value. So if you invest in an S&P 500 index fund, you indirectly own a small piece of this real estate through the fund.

The S&P 500 is a diversified mix of many industries.

Before last week’s change, the S&P 500 Index was comprised of 10 sectors:

chart

Now, 3% will be taken out of Financials and put into the new Equity REITs sector. This is about the same as the Utilities, Materials, and Telecom industries.

The S&P 500 (which actually now contains 505 companies) represents about 80% of the market with assets of $2.2 trillion.

Like all index funds, S&P 500 index funds are passively managed.

This means that the fund manager has to make sure the index fund mirrors the S&P 500. So if a company falls out of the S&P 500 index, the fund manager has to sell the stock and replace it with the stock of the new company that takes its place.

  • In March 2015, Avon was dropped from the index and Hanes took its place.
  • In September 2012, after being in the index for 55 years, Sears was dropped and replaced by LyondellBassell.
  • There is usually a good reason for the replacement. But if you really want to hold the stocks of Avon and Sears, you need to purchase them on your own. The index fund no longer holds them.
  • This is one of the chief complaints against index funds – they lack flexibility.

In the case of the REITs, they were already in the S&P 500. They will just be in their own category now so investors can get a clearer picture of their performance over time.

In the interest of full disclosure, both my husband and I own Vanguard S&P 500 Index Fund Admiral Shares.

For more information on Investing, visit my Basic Financial Management page.