Nasdaq Real Estate Investment Trust (REIT) Indexes

A unique way to provide smart-beta exposure to the U.S. real estate market through the usage of REIT security types. 

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Nasdaq Global Indexes and ETRE Financial have created a family of REIT indexes designed to bring a higher level of understanding to the tracking, trading, investing, and benchmarking of exchange-traded real estate.

This index family applies principles of Smart Beta to the REIT sector in order to convey enhanced performance and improved targeted exposure for real estate investors across the composite and sector performance indexes. 

The Nasdaq ETRE Index family provides an improved approach to better serve investors for tracking real estate valuations using Enterprise Value (“EV”) as opposed to the traditional use of Market Cap. 

Like other models of smart beta in the equity space, the Nasdaq ETRE indexes provide high correlation and occasional outperformance

Six REIT Indexes

How We Differ from Other REIT Indexes

Traditional publicly traded REITs provide investors access to income producing commercial real estate in multiple defined sectors. REITS are traditionally based on a company’s tax treatment definition as a REIT and then, a sector classification system that allocates across retail, office, industrial, multi-housing, hospitality, and healthcare. They are predominately based on market capitalization, which constrains significant pricing and performance differences amongst the various REIT indexes. Most REITs are not structured to take advantage of changes and velocity of market cycles. 

Nasdaq ETRE Indexes are weighted upon a modified free floating Enterprise Value (“EV”) aggregate that is structured using the Penrose Square Root Law to provide a formal assembly of normalized weighting to the indexes. This is different from traditional market capitalization-based REIT indexes that often do not reflect changes in underlying real estate values and that have performance challenges related to external control limits and overweight percentage allocation. 

The restraints in the market capitalization methodology are a result of the deficiency to include the entire capital stack of the underlying property assets within the REIT equities. 

Plus, market capitalization methodology does not allow for standard real estate measures of cap rate, loan to value and price per unit, that are dependent upon the EV, to be fully reflected in the performance of the indexes.

What is Enterprise Value?

  • EV = a REIT’s Equity Market Cap, Minority Interest, Preferred Shares and Cash
  • EV components reflect the broader asset valuation of commercial real estate under the Nasdaq ETRE index structure.
  • In most cases, commercial real estate assets will be comprised of preferred and common equity, minority interests, leverage that includes secured and unsecured debt, and cash for calculation of the Total Asset Value.
  • Total Asset Value: Enterprise Value = Market Capitalization + Total Debt + Preferred Equity + Minority Interest - Cash & Equivalents
  • The use of EV, rather than the traditional Market Cap seeks to weight the components of the Nasdaq ETRE Indexes based on the total value of the underlying properties of the REIT and the EV of each component, rather than simply the market cap equity value of the component.
Why use EV?
  • We use a weighting system that incorporates EV as the basis for an index would more closely approach the actual performance of the commercial real estate marketplace based on the fully extended valuation of the real estate properties within each of the index components.
  • Nasdaq ETRE uses a novel, improved weighting system based on EV and the Penrose square root law.
  • Each index component is considered independent.
  • Penrose square root law creates a more representative weighting of the marketplace.
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