When State Street (STT) first launched the SPDR S&P 500 ETF (SPY), it gave birth to the entire exchange-traded fund industry. Equally important was its suite of SPDR Select Sector ETFs that allowed investors to slice-and-dice their portfolios by individual sectors or industries.
Since those launches, State Street has managed to grow that suite of funds enormously and has recently eclipsed $88 billion in assets for the lineup of ETFs.
That growth has come in spite of no major product line changes for nearly two decades.
Well, 17 years later, investors may finally get some changes. STT is back with the first big addition and change to the suite of Sector Select ETFs. The asset manager has added two new ETFs to the lineup — the XLRE and the XLFS — and is cutting fees on the entire line of ETFs.
At the end of the day, more choice and lower fees are great news for investors — both retail and institutional.
XLRE and XLFS Reflect Classification Changes
Most indexing firms use a set of standards to classify what business a firm operates in. It’s called the Global Industry Classifications Standard (GICS) sector designation, and it’s what’s decides when an “energy stock” is an “energy stock.”
Historically, real estate investment trusts (REITs) were classified as financial firms. Recently, however, S&P and MSCI have been tinkering with that definition and decided to “reclassify” REITs as their own category. That decision will have a wide rippling effect on indexing across the board when the new standard finally goes into effect.
STT chose to get ahead of the ruling with launched two new ETFs — the Real Estate Select Sector SPDR Fund (XLRE) and the Financial services Select Sector SPDR Fund (XLFS).
The XLRE will track the Real Estate Select Sector Index, which includes real estate management, development and construction firms as well as REITs. However, the ETF does not include mortgage REITs. Top holdings include industry stalwarts like Simon Property Group (SPG), Prologis (PLD) and Public Storage (PSA). The ETF includes a good breakdown of real estate subsectors, covering everything from residential/apartment REITs to healthcare/hospital REITs. The underlying index has a dividend yield of 3.34%.
XLFS will track the Financial Services Select Sector Index. This metric seeks to follow a basket of banks, insurance brokers, capital markets, consumer finance and mortgage REITs. The ETF’s top holdings include mega-bank JPMorgan Chase (JPM), insurance giant MetLife (MET) and American Express (AXP). Despite its broad mandate, XLFS is very much a banks ETF with about 58% of its holdings in bank and bank-like stocks.
Perhaps the easiest way to think of the two new ETFs is that they break the behemoth Financial Sector SPDR (XLF) into two pieces. Currently, the benchmark XLF holds 88 firms. Those 88 stocks are found in their respective sub-sector SPDR ETFs — 63 in XLFS and 25 in XLRE.
The ETFs can now be used to break about and sub-divide a portfolio even further. Like bank stocks in the face of rising rates, but worried about REITs prospects? Buy the XLFS. Need income? Add some of the XLRE.
ETF Investors Should Be Happy
While the newly launched XLRE and XLFS ETFs are great for active indexers, the real big news from STT could be the fact that it also announced lowered expense ratios for its entire suite of Sector SPDRs. It will now cost just 0.14% — or $14 per $10,000 invested — to own the entire suite. That’s down from 0.15%. It also encompasses the two new ETFs on top of bellwethers like the XLF and the Energy Select Sector SPDR ETF (XLE).
To some, that drop may seem paltry. After all, it is only one hundredth of a percentage point annually. However, when State Street launched the suite of ETFs back in 1998, the expense ratios were 0.65%. That 79% decline in operating expenses is nothing to sneeze at. Lower operating expenses means that an ETF can track its index more closely, which ultimately leads to bigger gains for investors.
While the Sector SPDRS aren’t the cheapest ETFs on the block, they are some of the most liquid in terms of trading volume. And as such, the tight bid/ask spreads plus the low expenses ratios create some of the cheapest funds on the planet.
Ultimately, more and more ETFs sponsors will follow suite and remove REITs from the financial sector as their own classification. STT may be jumping the gun on the decision, but it gives investors a head-start in slicing-up their portfolios to suit their own needs. Add in the lowered expense ratios and you have a win-win announcement from the asset managers for investors.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
