Creating the XLRE: Market Implications for REITs and the Real Estate Sector

Abstract

On October 7, 2015, State Street Global Advisors launched the first new sector ETF (SPDR) since the inception of these sector funds in 1998. This was just one of many market events spurred by Morgan Stanley Capital International (MSCI) and Standard & Poor’s Dow Jones (S&P DJ) decision to officially give real estate its own market classification. Since this was the first time an event of this kind had taken place, markets were uncertain about the effects such a change could have on the underlying real estate assets. This paper provides a comprehensive study of the real estate sector SPDR (XLRE) launch event and the impacts on the underlying real estate investment trusts (REITs). We find evidence of positive price effects, no significant liquidity effects, and a negative volatility effect. This is the first study combining these effects where others focus on the volatility effects of ETFs on underlying stocks. Since our study contradicts the results of previous volatility studies, we show that further comprehensive analysis of these events is warranted.