The Chicago Board of Trade expands its Dow^SM futures complex by introducing CBOT Dow Jones U.S. Real Estate Index futures (DJUSRE Index futures), an electronically-traded equity index futures contract. Based on the Dow Jones U.S. Real Estate Index, which is comprised primarily of Real Estate Investment Trusts (REITs), DJUSRE Index futures provide investors with efficient, cost-effective exposure to the U.S. commercial real estate market.

 

1. What are CBOT Dow Jones U.S. Real Estate Index futures?

As an equity index futures contract, DJUSRE Index futures offer investors a new vehicle for capitalizing on changes in the real estate sector of the stock market. DJUSRE Index futures also provide a means for real estate portfolio managers to manage commercial real estate exposure.

2. What are the features of the Dow Jones U.S. Real Estate Index?

The Dow Jones U.S. Real Estate Index is a capitalization-weighted, real-time index that provides a broad measure of the U.S. real estate securities market. It currently consists of 91 stocks, of which 84 are REITs^[1]. Since components of the Dow Jones U.S. Real Estate Index are traded in the stock market, it is simple and transparent, and data is readily accessible. The DJUSRE Index futures contract is $100 times the Dow Jones U.S. Real Estate Index, and is quoted at .10 per index point, or $10.00 per contract.

3. Why did the CBOT base the DJUSRE Index futures contract on an index composed primarily of REIT stocks?

REIT prices are particularly good proxies for market valuations of U.S. commercial property (e.g., hotels, office buildings, industrial sites, shopping centers, and apartment complexes).  Since 1960, REITs have been afforded special status under the Internal Revenue Code (Title 26, Section 856).  One consequence is that REITs pay little or no Federal income tax but must distribute nearly all their income to their shareholders.  For this reason, REIT price dynamics directly and clearly mirror changing trends in leasing rates for commercial property, as well as movements in commercial real estate valuations arising from, e.g., vacancies, development costs, and property transaction values.

4. Who uses CBOT^® Dow Jones^SM U.S. Real Estate Index futures?

CBOT DJUSRE Index futures appeal to a variety of market participants, including REIT portfolio managers, pension funds, hedge funds, endowments and foundations, proprietary traders, commercial property owners, real estate developers, real estate finance companies, and private equity firms. There are many applications for DJUSRE Index futures, such as hedging a portfolio of real estate stock, and expressing views on real estate company share prices or conditions in the underlying commercial property market. Institutional investors seeking exposure to real estate as an asset class and commercial property market participants looking to hedge forward purchase and sales commitments also find the DJUSRE Index futures useful for managing these risks. 

In addition, DJUSRE Index futures can be spread against other equity index futures, against exchange-traded funds (ETFs) such as  iShares^® Dow Jones U.S. Real Estate Sector Index Fund (IYR), or used as a hedge for portfolios of real estate stock.

5. What are the advantages of CBOT DJUSRE Index futures?

There are numerous benefits to using CBOT DJUSRE Index futures:

• Liquidity: Standardized, exchange-traded futures markets maximize liquidity, narrowing bid-offer spreads and enabling traders to enter and exit the market with lower transaction costs.
• Real Estate Exposure Without Ownership: DJUSRE Index futures provide a more cost-effective and efficient means to obtain exposure to real estate as an asset class, without the obligation of owning the underlying property.
• Ability to Short the Market: The nature of futures markets means that DJUSRE Index futures can be sold as readily as they are bought, allowing a more efficient method of shorting the real estate market.  Moreover, traders are not subject to uptick rules, fees, or loans for short selling as can be the case with stocks or other types of investments.
• Leverage: The futures margining system allows investors to manage their capital much more efficiently than in other markets. Instead of depositing a minimum of 50% of the value of securities they purchase as required with other equity securities (per Federal Reserve Regulation T), futures traders are only required to post a margin or performance bond. Margin requirements in the futures markets are based on the risk associated with the position and are generally significantly less than 50%, providing a more effective use of investor’s capital.
• Electronic Access: Because DJUSRE Index futures are electronically traded, traders and investors can access the market virtually around the clock.

6. What are the settlement procedures for CBOT DJUSRE Index futures?

DJUSRE Index futures trade in the March quarterly cycle (March, June, September, and December) and are cash-settled on the third Friday of the expiration month. The final settlement price is based on the Special Opening Quote (SOQ) of the Dow Jones U.S. Real Estate Index calculated from the opening prices of the component stocks at their primary exchanges on settlement Friday. 

7. What is the trading algorithm for CBOT DJUSRE Index futures?

CBOT DJUSRE Index futures utilize a Price/Time (FIFO) trading algorithm. The highest bid or lowest offer has priority over orders in the same contract month, and the first order at a specific price has priority over all other orders at the same price. 

8. Is off-exchange trading available for CBOT DJUSRE Index futures?

Yes. Exchange-For-Physicals (EFP) transactions are available for CBOT DJUSRE Index futures. The Exchange will accept EFPs against securities for which price dynamics are reasonably correlated with price dynamics in the Dow Jones U.S. Real Estate Index.  Examples of such securities might include portfolios of correlated stocks, or ETFs such as the iShares Dow Jones U.S. Real Estate Sector Index Fund (IYR) or the streetTRACKS^® DJ Wilshire REIT ETF (RWR).

9. Will there be a market maker for CBOT DJUSRE Index futures?

Yes. The CBOT will institute a liquidity provision program to support the launch and growth of DJUSRE Index futures.

10. Will there be options listed for CBOT DJUSRE futures?

At the present time the CBOT is only listing DJUSRE Index futures. However, as always, we will continue to monitor the market and the decision to introduce options will be dictated by the needs and demands of our customers.