Real estate equities are finally getting their own investment classification, but the benefits of their change might not be apparent until years after their reclassification while the impact on financial sector ETFs could be immediate.

At the end of August, S&P Dow Jones and MSCI will give REITs and other real estate companies their own sector under the Global Industry Classification Standard (GICS), which categories equities by economic sector.

“I expect the reclassification will have a major impact, but I don’t expect it to happen overnight,” says Michael Grupe, executive vice president of research and investor outreach for NAREIT. “As people work with their advisors, as they accumulate more savings in investments and start thinking more about how their assets are allocated, it’s going to be a plus.”

Following the transition, publicly listed REITs will enjoy newfound visibility to investors, advisors and asset managers, says Grupe.

Grupe does not expect major inflows into REITs on Sept. 1, when the new classification takes effect.

“There’s a thought that when the S&P and MSCI make real estate it’s own separate sector, then general mutual funds, both indexed and active, will have to re-up on REITs to get to the market weight, but I have a little more of a reserved view,” Grupe says. “The more important thing is that this gives the managers of existing Financial sector funds the opportunity to disentangle real estate from those products.”

When the GICS was first established in 1999, REITs were a small sliver of the financials sector. Since that time, the number of REITs has multiplied, their net asset value has increased and several have been listed on the major market capitalization-oriented indexes such as the S&P 500.

REITs were never a good fit with the rest of the financial universe, says Allan Swaringen, CEO of JLL Income Property Trust, a non-traded REIT based in Chicago.

“Real estate and financial services are relatively strange bedfellows,” Swaringen says. “If you think about the underlying performance drivers of financial companies, whether they’re investment management firms or banks, it’s different from what drives the performance and valuations of real estate companies. This is a movement in a positive direction not only for the analyst community, but for the overall real estate industry.”

Non-traded and private REITs will not be directly affected by the reclassification and reconstitution of the MSCI and S&P Dow Jones indices, Swaringen says.

Publicly traded REITs, on the other hand, may finally enjoy some freedom of movement, he adds.

“Publicly traded REITs have been shown to have a relatively high correlation to the broader market,” Swaringen says. “De-linking financial services and real estate might over time create a more pure correlation or volatility for these REITs, more in line with private REITs — which tend to be less volatile.”

Mortgage REITs, companies that manage real estate debt rather than the equity properties themselves, will remain in the financials sector.

Yet REITs currently account for nearly 20 percent of the financial sector. A change in the classification radically changes the indexes underlying many financial ETFs.

The move, announced last year, has prompted response from asset managers. State Street Global Advisors, which manages the Financial Select SPDR ETF (XLF), the largest financial ETF, has launched a new Real Estate Select SPDR Fund (XLRE) in advance of the reclassification. When the financial sector Index is reconstituted, State Street will issue a special dividend to XLF shareholders comprised of shares of XLRE.

Other financial sector funds that use MSCI and S&P Dow Jones indices will sell off their REIT exposure after the reclassification.

The Guggenheim S&P 500 Equal Weight Financials ETF (RYF) will lose its REIT exposure after Aug. 31, said Guggenheim spokesman Ivy McLemore.

“As the underlying indexes our ETFs change, we correspondingly rebalance/reconstitute the funds’ holdings as necessary in pursuit of delivering on the investment objective to track the performance of the underlying index,” McLemore said responding to questions by email. “S&P’s changes to the indexes will be the catalyst for changes in the funds.”

The firm does not expect major changes to the Guggenheim S&P 500 Equal Weight Real Estate ETF (EWRE) as a result of the reclassification.

The Vanguard Financials ETF (VFH), which currently allocates nearly 30 percent of its assets to REITs, will also shed its REIT exposure when it rebalances after the classification, said company spokesman David Hoffman.

The Fidelity MSCI Financials Index (FNCL) would also presumably follow the MSCI index out of its REIT exposure later this year. Fidelity couldn't be reached for comment.