“On September 16, some 100 billion dollars could begin to flow into one sector of the market…”

What's Dr. David Eifrig pitching as the thing the market's biggest players have to buy next month because of "Sector Code 60?"

By Travis Johnson, Stock Gumshoe, August 25, 2016

The latest ad from Dr. David Eifrig for his Income Intelligence service (published by Stansberry) makes it seem like there’s something secretive and amazing happening that will boost your portfolio… and it’s happening immediately and on a specific date (September 16).

So what is it?

Here’s the intro to the ad:

“Last year, two of the most powerful financial entities in the world quietly sent out a 4-page press release.

“It laid out a shocking change to the financial markets that will take effect on September 16, 2016.

“This document wasn’t an academic paper or a commentary about something that might happen. It was an official notice…

“It announced the creation of a new rule — Sector Code 60 — under something called the Global Industrty Classification Standard (GICS).”

He goes on to say that this shift, which I think actually takes place on August 31 but could have its biggest single-moment impact on September 16, is going to lead to a “wave of $100 billion in buying.”

So what’s he talking about?

This is all in reference to the creation of an 11th major sector by the GICS folks, who are the ones who try to keep global investing organized and categorized.

Today the ten sectors that are used by pretty much everyone, whether to classify their investments or ensure diversification or build investment products or whatever, are:

  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Information Technology
  • Materials
  • Telecommunication Services
  • Utilities

And as of the end of this month, to be most notably evidenced when Standard & Poors does their annual rebalancing of funds and indexes on September 16, there will a change to these top-level sectors for the first time in decades… and we’ll go from ten sectors to 11:

  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Information Technology
  • Materials
  • Telecommunication Services
  • Utilities
    and…
  • Real Estate

Real Estate is being carved out of the Financials sector, where it has been hiding for decades, and the thinking is that this new upper-level focus on Real Estate — mostly equity REITs — will have a big impact on making REITs less volatile, more popular, and perhaps more valuable.

That’s not necessarily because REITs will make up a larger percentage of the broad market, or of the big indices, but for rather squishier reasons — like increased visibility, a larger number of investors asking their advisers about REITs, and a growing acceptance that REITs are not just an “alternative” asset for income seekers but are a major sector all their own and should be a core part of most portfolios.

This might not happen, or it might not happen with great speed — particularly since REITs have already risen pretty dramatically in popularity over the past couple years as low interest rates have sent investors hunting for yield… but the wind is at the backs of the real estate sector to at least some degree because of this shift that will impact lots of institutional money, ETFs, and, perhaps, REIT visibility and popularity.

I shouldn’t use “real estate sector” and “REITs” interchangeably — but for most intents and purposes, they will mean the same thing. Equity REITs will, according to estimates I’ve seen, make up roughly 95% of the new “real estate” sector (the rest will be publicly traded companies in real estate operations and management who have not chosen to be REITs).

And I should also explain what I mean by “equity REITs” — equity REITs are what probably most of you think of as REITs, they are the Real Estate Investment Trusts who primarily focus on buying real property and leasing it to tenants, whether that’s apartment buildings or malls or office buildings or hospitals or whatever. That’s what’s going to make up the bulk of the new real estate sector.

There’s also another class of REITs that some of you may have run across called Mortgage REITs, and those are staying in the financial sector (where they belong). Mortgage REITs are financiers, they mostly buy and trade mortgage bonds, they don’t own real property, and they are both more levered, on average, than equity REITs, and more specifically dependent on things like interest rate spreads.

So what will the impact really be? Lots of folks are expecting a significant impact over the long term, but the long term also started last year — the official rebalancing of S&P indexes happens in mid-September, but this change was announced in 2015 and it seems likely that there’s been some preparation for the expected switches, so it’s less of a “REITs will jump by x% on September 16” rationale than it is a “REITs will get more attention and seem likely to rise based on that attention.”

Which wouldn’t be shocking — REITs have beaten the broad market pretty handily over the past 20 years, and according to the REIT industry groups REITs have outperformed the S&P 500 for seven of the last ten years. So “REITs doing well” wouldn’t be a change.

But it might be enough to help REITs do better than they otherwise might during what is expected to be a challenging time IF we start to see steadily rising interest rates.

That’s a big “if” — the great fear for REITs is that rising rates will hurt their prices, just as they hurt the prices of bonds and other income investments. And sometimes that’s how the market works, at least in the short term (over the longer term, rising rates generally are signifiers of inflation, and inflationary times have generally been good for real estate values so REITs don’t necessarily become permanently impaired by a rate hike — REITs have generally done fine during and following longer periods rate increases).

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And REIT investors (myself included) have been fearing those rising interest rates for more than three years, going back at least to the “taper tantrum” in the Spring of 2013, when then Fed Chair Ben Bernanke talked about “tapering” the quantitative easing