Why a 10% Yield on REM Still Lost Investors Money: The Mortgage REIT Trap
A 10% yield sounds like a gift, but mortgage REITs have a long history of handing investors something far less appealing once the full picture comes into focus.
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Some asset classes naturally come with high yields because investors are being compensated for taking substantial risk. Mortgage real estate investment trusts, or mortgage REITs, are a good example. These aren’t like conventional equity REITs that own portfolios of office buildings, apartments, warehouses, shopping centers, or data centers.
Mortgage REITs are more accurately described as specialty finance companies. At a simplified level, many borrow money at shorter-term rates and invest in longer-dated mortgage-backed securities (MBS) and other mortgage assets. The difference between their funding costs and the yield on their assets contributes to their net interest spread.
When financing is cheap, mortgage assets perform well, and spreads are favorable, their use of leverage can magnify returns. But leverage also works in reverse, and mortgage REITs face additional risks from changing interest rates, mortgage prepayments, hedging costs, MBS valuations and changes in book value.
The poster child among mortgage REIT ETFs is the iShares Mortgage Real Estate ETF (REM). I’ve found that income investors can easily gravitate toward a fund like this because REM currently has a 10.49% 30-day SEC yield. But as I’ve always stressed, total return is what matters. And REM’s long-term record provides a good example of why chasing high yields is suboptimal.
What Happened to a $10,000 Investment in REM?
REM has enough history that we can evaluate the strategy across several very different market environments. Using a Testfolio backtest from May 4, 2007 through Oct. 6, 2026, a period of approximately 19.43 years, REM lost 2.08% annualized. Its cumulative return was negative 33.59%.
And yes, that’s total return. Those large distributions are assumed to have been reinvested perfectly. An investor starting with $10,000 would still have ended with only about $6,641. That’s before taxes and before adjusting for almost two decades of inflation. You would have been better off holding Treasury bills.
This is exactly why I don’t like evaluating income investments by asking how much they distribute. A 10% yield doesn’t mean you’re earning a 10% return. If an investment pays you a large distribution while its underlying capital declines enough to offset that income, your total return can still be poor or even negative.
Leverage magnifies all of this. If the assets decline sufficiently in value, a mortgage REIT can experience significant book-value losses and may need to reduce leverage at an unfavorable time. Hedging can reduce some rate exposure, but hedges cost money and can’t eliminate every risk.
Why I Don’t Like Mortgage REITs as Buy-and-Hold Investments
I don’t think mortgage REITs are inherently a bad asset class. There are macroeconomic environments where the business model can work very well. The ideal scenario generally involves favorable funding costs, a healthy spread between short- and longer-term rates, relatively stable interest rates, manageable interest-rate volatility and supportive mortgage valuations. A steepening yield curve can be particularly helpful when longer-term asset yields remain attractive relative to short-term financing costs.
However, I don’t particularly like the current setup in 2026. The effective federal funds rate is around 3.88%, while longer-term Treasury yields have surged, with the 10-year recently reaching its highest level in roughly 24 years. Mortgage rates have also climbed sharply, with the average 30-year fixed rate reaching 7.49% in the latest Mortgage Bankers Association data.
Could mortgage REITs rally from here? Absolutely. I could be wrong about the macro outlook. If rate volatility subsides, financing conditions improve, the yield curve develops a more favorable shape, and MBS valuations recover, the combination could become much more supportive.
But when I’m deciding where to put money today, mortgage REITs don’t offer a risk-return trade-off I find particularly attractive. REM’s 10.49% SEC yield looks enticing, but investors are accepting excessive leverage, interest-rate risk, spread risk, prepayment risk and significant sensitivity to MBS valuations to get it.
Contact [email protected] for any questions or corrections.
Tony Dong is the founder of ETF Portfolio Blueprint. He also serves as Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE.
Tony’s work focuses on ETF strategy, portfolio construction, and risk management, with an emphasis on making complex investment concepts accessible to everyday investors. His insights and analysis have also appeared in U.S. News & World Report, Kiplinger, MoneySense, and The Motley Fool.
Tony holds a Master of Science degree in enterprise risk management from Columbia University and the Certified ETF Advisor (CETF) designation from The ETF Institute.
