The Risk and Return Effect of a New S&P Sector

Abstract

Changes to the S&P 500 Index have been found to provide a wealth effect to the firms included or removed from the Index. On November 10, 2014, the S&P Dow Indices announced the addition of the first new GICS sector in the S&P 500 since technology stocks became a separate sector in 1999. Equity real estate investment trusts (eREITs) were separated from the financials sector, creating an 11th sector. We examine the return and risk effect of the creation of the new sector. We find a divergence in the risk of firms in the new sector and the non-S&P eREITs relative to the market. The eREITs in the S&P 500 Index maintained a lower risk, while the eREITs not in the Index increased in risk.