Vanguard announced a change to their REIT Index fund’s investment objective. The fund has historically tracked the MSCI US REIT Index. Starting mid 2018 the fund will track the MSCI US IMI Real Estate 25/50 Index. Is it possible these upcoming changes present an opportunity?
What are the major differences?
There are some big differences between the two indexes. Lets take a look at the top 10 weighted companies of each index:
|US REIT (OLD INDEX)||Weight %||US IMI REAL ESTATE 25/50 (NEW INDEX)||Weight %|
|SIMON PROPERTY GROUP||5.87||AMERICAN TOWER CORP||5.71|
|EQUINIX||4.20||SIMON PROPERTY GROUP||4.72|
|PROLOGIS||4.08||CROWN CASTLE INTL CORP||4.25|
|WELLTOWER INC||2.87||PUBLIC STORAGE||3.11|
|EQUITY RESIDENTIAL||2.85||WEYERHAEUSER CO||2.48|
|DIGITAL REALTY TRUST||2.78||AVALONBAY COMMUNITIES||2.33|
|BOSTON PROPERTIES||2.24||EQUITY RESIDENTIAL||2.29|
Let’s take a look at the big changes in top 10 positions. As a result of these changes Vanguard will be making American Tower ($AMT) and Crown Castle ($CCI) top 10 positions in their fund. American Tower and Crown Castle are highly correlated. Combined they will account for 10% of the fund. A typical passive index investor would probably prefer to avoid this level of concentration. For our purposes one thing matters. Vanguard will be buying a bunch of stock in $AMT and $CCI.
Can index changes create a trading opportunity?
Yes they can. Here are some examples:
- In 2012 Fairfax Financial was kicked out of the MSCI Canada Index. Shares were down almost 10% because an index fund was unloading. Luckily I was looking at Fairfax’s stock price that day and noticed the drop. I bought without knowing the reason for the drop until later in the day. Better lucky than good 🙂 Had I been follow Continue reading “Can Vanguard REIT funds boost American Tower and Crown Castle?”