Does Valuation-Indifferent Indexing Work for the Real Estate Market?

Abstract

In historical testing, valuation-indifferent indexing produces statistically significant and economically large outperformance relative to traditional capitalization-weighted indexes. This result has been found for both U.S. and global equity data, as well as U.S. corporate bonds and emerging market bonds. This article reports a research application of the valuation-indifferent indexing method to construct two indexes covering U.S. and international-listed real estate companies. The authors find that the valuation-indifferent real estate indexes outperform the corresponding cap-weighted benchmark indexes by 3.96% (U.S. market) and 2.9% (global ex-U.S. market) per year. This finding suggests that using a valuation-indifferent indexing strategy can significantly improve the performance of passive real estate investing.

TOPICS: Real estate, security analysis and valuation, mutual funds/passive investing/indexing