To add another option for investors, listed real estate securities are not alone when it comes to real estate index funds. There has been development on the private real estate side with derivatives products based on the NCREIF Property Index.

In 1982, the National Council of Real Estate Investment Fiduciaries developed a database consisting of property operating information that used to be known as the Russell/NCREIF Property Index (the Frank Russell Company had published the index). In 1995, NCREIF assumed full responsibility for the index, including its publication and distribution and renamed it the NCREIF Property Index (NPI).

Last year, Credit Suisse First Boston LLC joined with NCREIF in an attempt to create the first U.S. real estate investment derivatives market.

Depending on one's view of real estate, whether bullish or bearish, writing derivatives off the NCREIF index allows investors to go long or short on real estate, explains Jeffrey Altabef, a managing director at CSFB. This could be done without actually trading the underlying real estate, he says.

"There are many ways that derivatives can be based on the NPI," writes Jeffrey Fisher, a professor of finance and real estate at Indiana University Kelley School of Business, in a report on the new market. "They could be based on total return for the NPI or a component of the return such as the capital return which reflects the change in the value of properties over time (net of capital expenditures)."

The two advantages for real estate investors in having a derivatives market based on the NCREIF index, Altabef adds, are that they allow them to get into real estate at a time when it's not so easy to find good investment properties, and secondly, "there is no other way to hedge real estate ownership except for selling properties." So, investors can reduce risk or swap into other forms of real estate without the hassles of selling the underlying properties.

There is already a similar derivatives market in the United Kingdom. That market is benchmarked to the Investment Property Databank Index and there have been more than

$1 billion in real estate derivatives contracts written, according to Pensions & Investments. The CSFB\NCREIF market for derivatives was unveiled mid-year 2005 and its first two trades have been completed.

While there has been considerable interest in a real estate derivatives market, Altabef admits, "it has taken a whole lot of education to get people excited by the idea of bringing this technology to real estate."