S&P Inclusion Helped Make REITs Mainstream

7/14/2011 | By Allen Kenney

Ten years later, the inclusion of REITs in the Standard & Poor's indexes has helped bring the industry into the mainstream of the investment world, according to Hany Guirguis, professor finance and economics at Manhattan College.

In a REIT.com video interview at REITWeek 2011: NAREIT's Investor Forum at the Waldorf=Astoria in New York, Guirguis discussed the impact of REITs' inclusion in the S&P indexes and his research on the effects of exchange-traded funds (ETFs) on the industry. Guirguis cited a number of benefits flowing to REITs after being added to the S&P. They include improved transparency, better visibility, increased efficiency and the acceleration of the spread of information, according to Guirguis.

"Today, REITs are considered a mainstream investment, and this couldn't have been accomplished without being part of the S&P 500," Guirguis said.

Reviewing his studies on the impact of ETFs on REITs, Guirguis noted that because ETFs generally include a number of investment categories, their presence in the market generally leads to more pronounced correlations and common movements. "Whenever you sell one share of an ETF, you are trading all of these securities at the same time," he said. "So, it's rational to expect to see stronger common movement and stronger volatility spillover effects."

Guirguis said his research had uncovered "significant" increases in the volatility of ETFs' underlying real estate securities once they were included in the products. Additionally, he said that volatility in REITs spiked late in trading sessions as ETF managers make trades to balance their portfolios.

As such, Guirguis suggested that investors reconsider their views on REITs' correlation to the broader market. He said the data indicate that correlations differ among the various REIT sectors. For example, while office and residential REIT stocks have strong correlations with the broader market, the retail sector's correlation is noticeably weaker.