We have now officially published our new stock market index Reitlog Index to help investors keep tabs on the Real Estate Investment Trust sector. Although based on methodology It is a price-weighted index, however it comes with a twist. Hence we would potentially have to call it a hybrid index. We have introduced a series of adjustments to balance impact of the constituents and to allow smaller REITs have a bigger impact on the index.
How many constituents are there in Reitlog Index?
There are currently 202 constituents tracked by the Reitlog Index. It’s roughly 50% of the entire number of mainstream global REITs. We picked the companies based on liquidity, market cap and a range of other factors. Just like any other market index, the number of constituents will go up and down as new companies are added in and ones that no longer satisfy the entry limits are taken off.
What is the current Reitlog Index*?
REITLOG – 854.3053650 -0.90%
Healthcare – 884.7611017 -1.60%
Hotel – 573.2547539 0.10%
Industrial – 707.3768293 -0.12%
Infrastructure – 1137.701143 -1.03%
Mortgage – 295.2404829 -0.15%
Residential – 824.0250098 -1.04%
Retail – 867.3990943 -0.97%
Specialty – 920.4814884 -0.78%
Storage – 1042.709556 -0.88%
*correct at the time of the previous market close.
Does Reitlog Index have sub-indices?
Yes, the 202 constituents of Reitlog Index represent following REIT types: Diversified, Healthcare, Hotel, Industrial, Infrastructure, Mortgage, Office, Residential, Retail, Specialty and Storage. Sub-indices are published for all these sectors.
Why is Reitlog Index adjusted?
The downside of price-weighted market indices is the unevenness of the price profile. For example, our 211 constituents’ share price ranges from $0.58 to $222. Without adjustments, fluctuations of the fifty cent price would have zero impact on the index regardless of the fact that the company is relatively important in the grand scheme of things.
At the same time, the $222 shares would skew the index in an unnatural way considering this is an outlier. Keeping the REIT index fluctuations fair and representative is a challenge that we decided to overcome by introducing a series of adjustments. Does that make Reitlog Index a hybrid index? We think this is a fair assumption because it introduces minimal yet tangible reliance on market capitalisation of the constituents.
Market Cap index
A numerical coefficient provided to reduce dependability on large cap stocks and giving the small caps a little bit more “voice”.
Median Tolerance for REIT share prices
Assigning additional weight to the “middle players” – large stable trusts that are often more representative of the situation on the “ground”.
Big Cap Tolerance
A further slight reduction to the weighting of the few large cap stocks that are potentially skewing the index. The introduction and calculation of the adjustments was carried out through careful modelling of different scenarios of price fluctuations.
Price-weighted vs Cap-weighted share indices
In the complex world of stock market indices, where benchmarks play a pivotal role in measuring market performance, the distinction between various indexing methodologies holds substantial significance. Among these methodologies, the price-weighted index stands as a prominent approach that differentiates itself distinctly from the more prevalent market cap-weighted indices. Understanding the dynamics and nuances of a price-weighted index is crucial for investors seeking to comprehend the intricacies of the stock market.
A price-weighted index, as the name suggests, calculates its value based on the prices of individual stocks within the index, rather than their market capitalizations. This method sets itself apart notably from market cap-weighted indices, where the weighting of each stock is determined by its market capitalization—the product of its share price and total outstanding shares.
One of the primary distinguishing factors of a price-weighted index is its reliance on stock prices. In this system, stocks with higher prices carry more significant influence on the index’s movements. As a result, companies with higher stock prices exert a more substantial impact on the index value compared to those with lower stock prices, regardless of their respective market capitalizations. This characteristic stands in contrast to market cap-weighted indices, where companies with larger market capitalizations hold more weight.
The simplicity of the price-weighted index calculation is another hallmark feature. The index value is determined by summing up the prices of individual stocks included in the index and dividing this sum by a divisor. This divisor helps maintain continuity in the index value over time, compensating for events such as stock splits, dividends, or other corporate actions that might affect stock prices.
What are the limitations of price-weighted indices?
However, the price-weighted methodology does come with inherent limitations. One significant drawback is that it doesn’t reflect the true proportional representation of a company’s size within the index. Unlike market cap-weighted indices, where larger companies carry more weight based on their market value, the price-weighted approach could overemphasize the influence of high-priced stocks and potentially underrepresent the impact of smaller companies with lower stock prices.
Another factor that distinguishes price-weighted indices is their historical significance. Some of the oldest and most renowned indices, such as the Dow Jones Industrial Average (DJIA), employ the price-weighted methodology. The DJIA, consisting of 30 large-cap stocks, has been a barometer of the U.S. stock market for over a century, although its methodology differs significantly from the broader market.
In conclusion, while price-weighted indices provide a straightforward and easy-to-understand methodology for calculating index values, they do possess limitations compared to market cap-weighted indices. Their reliance on stock prices can skew the representation of companies within the index, potentially affecting the accuracy of market performance measurement. Nonetheless, these indices continue to hold their place in the market landscape, offering a unique perspective on stock market movements and serving as important benchmarks for investors and analysts alike.
Understanding the nuances between price-weighted and market cap-weighted indices is crucial for investors navigating the complexities of the stock market, enabling them to make informed decisions based on a comprehensive grasp of various indexing methodologies.
As the market continues to evolve, we can expect to see further innovations and adjustments in these methodologies, ultimately shaping the way we measure and evaluate REIT market performance. So, it is important for investors to stay updated on these changes and understand the implications they may have on their investment strategies. A thorough understanding of different indexing methodologies will help investors make more informed decisions and navigate the decision making.