1. Why is this index being introduced now?
REITs are a popular and efficient way for market participants to access the real estate asset class. The potential for strong long-term total returns combined with other key investment characteristics, such as a tendency for high dividend yields, inflationhedging properties, and a relatively low correlation with other asset classes, have contributed to the appeal of REITs. However, because they are widely considered to be rate-sensitive assets, there is substantial concern among market participants that REITs will underperform when interest rates increase from their historically low levels. Although there is evidence that REITs have typically fared well over full cycles of rising rates, U.S. REITs have often experienced sharp sell-offs in short-term periods in which interest rates have increased significantly. Given this context, there is considerable interest in a U.S. REIT index that may be less sensitive to interest rate movements.
2. How does the index work?
The index is a subset of the Dow Jones U.S. Select REIT Index that only includes REITs in property sectors that typically have relatively short-term lease durations. These sectors are apartments, hotels/resorts, manufactured homes, and self-storage. Theoretically, REITs with shorter lease durations should be less sensitive to interest rates, given that they can more quickly reprice their rental agreements. For example, a hotel effectively has overnight leases and can rapidly respond to market changes. Similarly, apartment owners typically engage in one-year leases with tenants, making the average lease duration of apartment REITs under one year. On the other hand, office, health care, and other major REIT sectors generally have much longer-term lease durations—giving them more bond-like cash flow characteristics. The index also employs a 5% cap on stock weights to reduce single-stock concentration.
3. What are the characteristics and historical performance attributes of the index?
Over the full length of the back-test from September 2000 to November 2016, the Dow Jones U.S. Select Short-Term REIT Index outperformed the Dow Jones U.S. Select REIT Index 90% of the time during periods in which the 10-year U.S. Treasury Bond yield increased by more than 50 bps within a period of four months or less. For periods in which the 10-year U.S. Treasury Bond yield increased by more than 100 bps in a period of four months or less, the index outperformed nearly 99% of the time. Interestingly, the index did not consistently outperform or underperform the broader REIT market in periods of falling rates.