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Listed real estate equities reach critical mass

By: Catherine Yoshimoto, senior index product manager

In 2005, the Industry Classification Benchmark (ICB®) was launched as a comprehensive classification framework for the global equity markets, allocating companies to industry sectors and covering around 100,000 securities worldwide. Since then it has been adopted by stock exchanges, index providers and investment professionals around the world for industry and stock research and analysis as well as for indexes used as the basis for financial products. Yet, an industry classification system must evolve with the changing prominence of industries and economic activities in the global equity markets over time. To this end, in September 2017 FTSE Russell announced structural enhancements to take effect January 1, 2019. Here we will touch on some of the more prominent changes at the headline Industry level.

As we can see below, perhaps the most notable Industry change is that Real Estate will become its own ICB Industry, separate from ICB Financials. The Telecommunications Industry will be expanded, and Consumer Discretionary and Consumer Staples will replace Consumer Services and Consumer Goods. Finally, the ICB Oil and Gas Industry will be renamed Energy.

The addition of Real Estate as the eleventh ICB Industry has two key origins. First, real estate stocks have reached critical mass in global equity markets on their own – comprising 4.1% of the FTSE Global All Cap Index as of July 31, 2017. The real estate investment trust (REIT) structure which distributes regular dividends has grown globally and has become a key component of the listed real estate market, reaching a total market capitalization of USD $1.3 trillion and representing 41% of global listed real estate as of June 2017.[1]

The second compelling reason to separate Real Estate from the ICB Financials Industry is the decreasing correlations of real estate stocks to banks, financial services and insurance companies over the last decade, as illustrated below.

The weight of the ICB Financials Industry will be reduced as Real Estate becomes its own ICB Industry. However, as we can see below, the Financials Industry is projected to retain its status as the highest weighted Industry in the FTSE Global All Cap Index based on June 2017 market cap data.

 

The expansion of the ICB Telecommunications Industry is designed to reflect this industry’s increasing significance on a global scale. As we can see above, the new ICB Telecommunications Industry classification weight is expected to increase. Once the changes are implemented, Telecommunications will include companies that currently fall under the Technology Industry and Media Sector – including Telecommunications Equipment and Cable Television Services, respectively.

Another notable change at the ICB Industry level will be the reallocation of companies from the current ICB Consumer Goods and Consumer Services Industries to the new Consumer Discretionary and Consumer Staples Industries. This move reflects the tendency of stocks within the two new categories to exhibit distinct risk/return characteristics during different phases of the economic cycle. Consumer Staples companies tend to be less affected by the phases of the business cycle than Consumer Discretionary companies.

Finally, the renaming of the current ICB Oil and Gas Industry to the Energy Industry will allow the Industry to encompass the addition of the Coal Subsector from Basic Materials and the creation of new Renewable and Non-Renewable Energy Sectors.

As the global equity market continues to evolve, industry and company classification systems must adapt in tandem. FTSE Russell believes that the enhancements to its ICB methodology will more closely align with the current global equity market while allowing for further enhancements to the product in the future as the company continues to expand its capabilities.

For a more detailed look at changes at the Supersector, Sector and Subsector levels, please see the FTSE Russell Industry Classification Benchmark paper.

 

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[1] Source: EPRA Global REIT Survey 2017: http://www.epra.com/application/files/9515/0366/6834/Global-REIT-Survey-....

  

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