REM and MORT Pay Over 9% Yields, But Both Have Lost Money Over Five Years

There are variations in some asset class categories that can vary widely. For example, technology stocks can be involved with anything from hardware to semiconductors to software and A.I. The Real Estate/REIT sector is another one that can defy easy pigeonholing. Some REITs, such as Realty Income (NYSE: O | O Price Prediction) actually own and manage a menu of physical properties, and they pay dividends from their rent rolls. Some, like Prologis (NYSE: PLD), have their own construction and real estate development divisions. 

However, there are some high-yielding REITs that pay out massive dividends, with yields at 9% and higher. Very often, these are companies that handle huge volumes of mortgage-backed securities (MBS) and are more akin to portfolio managers than real estate managers, per se. However, although these companies may lack the overhead costs and headaches dealing with brick and mortar properties, they are not without their own risks and caveats. ETFs that load up on these high-yielding MBS-centered REITs naturally get the trickle-down effect of these risks. Two ETFs that have been paying out handsomely but may contain hidden booby-traps are:

• iShares Mortgage Real Estate ETF (CBOE: REM)
• VanEck Mortgage REIT Income ETF (NYSE: MORT)

Interest-Rate Blues and Trickle-Down Risk

While REITs that manage and own their own properties are less affected, interest rate sensitivity is a major risk for MBS-focused REITs.

As MBS are essentially bonds, they are subject to the same advantages and pitfalls. Therefore, they are very sensitive to prevailing interest rates, as set by the Federal Reserve bank. Under normal circumstances, the yield curve ranges from lower rates at nearer term maturities with higher rates the farther out the timespan. The relationship between bond prices and interest rates is an inverse one: when interest rates are low, bond prices are high, and vice-versa. 

ETFs that acquire sizable stakes in MBS-focused REITs inherit the same risks to their portfolios. When interest rates rise, the value of the billions of MBS values in those companies’ respective portfolios decrease, and the devaluation trickles down to their respective shareholders. Conversely, interest rate cuts make a yield curve steeper, which allows for increased margin borrowing, which many MBS-focused REITs do to enhance their total portfolio holdings, provided the interest rate carry remains in their favor. However, interest rate hikes can cause margin calls and other default risks, something many learned the hard way during the 2008 subprime mortgage banking meltdown. 

iShares Mortgage Real Estate ETF

The largest holdings in the REM ETF are REIT companies deeply involved with mortgage backed securities.

Launched on May 1, 2007, REM has swelled to $540.8 million AUM at the time of this writing. Owned and operated by asset management leviathan BlackRock, REM’s key info is below:

Top 5 Holdings:

• Annaly Capital Mgmt: 22.44%
• AGNC Investment: 14.67%
• Starwood Property Trust: 7.68%
• Blackstone Mortgage Trust: 4.45% 
• Dynex Capital: 4.45%

VanEck Mortgage REIT Income ETF

Inflation and skyrocketing interest rates hugely impacted MORT because its largest holdings are all interest rate sensitive.

Launched on 8-16-2011, MORT has a narrow $386.87 million AUM portfolio of 27 holdings that allow it to pay out a generous 13.23% yield. Other details include:

Top 5 Holdings:

• Annaly Capital Mgmt: 17.16%
• AGNC Investment: 13.54%
• Starwood Property Trust: 7.23%
• Rithm Capital: 6.46%
• Dynex Capital: 4.90%

Prudent Investor Key Points

Retirees need to exercise prudence in selecting REIT ETFs for inherent risks and not just buy for the high yields.

Due to the escalated interest rates and inflation suffered during Bidenomics, a $10,000 investment made in REM 5-years ago is worth $8,655.74, which is -13.44%. In the case of MORT, that $10,000 is worth $8,906.20, which is -10.94%. The yields from then are partially a return of capital, as depressed NAV during that period also indicates. 

As interest rates go down, the yield curve steepens and MSB portfolio values rise, as mentioned above. If that is the trend one believes the market is heading, then investing in REM and MORT for income and some partial upside makes sense. However, one needs to monitor interest rates closely as if these were bond investments, as opposed to buy-and-forget it REITs like Realty Income.