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The Dow Jones U.S. Select Short-Term REIT Index Explore REITs’ potential to deliver yield while protecting against rate changes.
BY Silvia Kitchener

The Dow Jones U.S. Select Short-Term REIT Index seeks to track REITs in sectors that typically have short-term lease durations, with the goal of creating a REIT index that is less sensitive to interest rate changes.



OVERVIEW: THE ROLE OF INTEREST RATES ON REIT INDICES



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, inflation-hedging 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 interest among market participants to see how REITs have performed when interest rates increased during periods of high fluctuation. 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.



HOW DOES THE INDEX WORK?



The Dow Jones U.S. Select Short-Term REIT 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. Exhibit 1 shows the different Dow Jones U.S. Select REIT Term Indices with their sub-sectors and the typical average lease duration. The indices also employ a 5% cap on stock weights to reduce single-stock concentration.

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