Life Is Good For Mortgage REIT ETFs

For comparison purposes, REM has recently diverged from a traditional REIT portfolio like you would find in the Vanguard REIT Index Fund (NYSEARCA:VNQ). The chart below shows how these two funds were maintaining a fair degree of correlation prior to the jump higher in rates.

rem_vnq

Historically these mREITs can be sensitive to changes in both interest rates and credit conditions. Although in today’s market they appear more fixated in the strength of stocks and high yield bonds. Any meaningful contraction in those areas will likely result in a concomitant pullback in REM as well.

For those that like a menu of options at their disposal, the VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) is a direct competitor to REM. This fund own a concentrated mix of 26 mREITs with a greater percentage of assets spread to the smaller holdings. MORT also charges a moderated expense ratio of 0.41% versus 0.48% in REM. This fund currently has over $100 million in assets and a 30-day SEC yield near 10%.

Lastly, for those who have an extremely high risk tolerance level and don’t like to sleep much at night, there are exchange-traded notes in this field with a built-in leverage component. The ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA:MORL) tracks an index of mREITs with a 2x daily price magnification. This fund has a current listed yield of 20.49% and income is paid monthly to shareholders.

Keep in mind that leverage on leverage is a volatile recipe with high costs and potentially unpredictable tracking patterns over long periods of time. Funds of this nature should be very carefully examined and used with great caution.

The Bottom Line

It’s always worth noting where the areas of strength or weakness are in the market and mREITs have certainly held a resilient path despite many obstacles.  I don’t currently own exposure to this segment of the market for my clients and would prefer to evaluate it again on a drop rather than buying up here near the highs. These types of funds would likely be appropriate as a small tactical play in the context of a diversified income portfolio with the inherent expectation of above-average yield and price volatility.

Note: This article is written by David Fabian and was originally published on the FMD Capital Management blog. FMD Capital Management is a fee-only investment advisor which provides daily updates on ETFs, portfolio strategies, and market insights. Contact them for a free portfolio review.