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Advisors and clients know that real estate investment trusts (REITs) are a beloved income-generating asset class. That perk comes with the drawback of negative correlations to interest rates, but hey, the widely followed Dow Jones U.S. Real Estate Capped Index sports a trailing 12-month dividend yield of 3%, or more than double the comparable metric on the S&P 500.
Luckily for clients, advisors also know that the REIT universe is expansive and includes myriad industry-level opportunities – no two of which are identical. Likewise, the income proposition isn’t uniform across the REIT landscape, confirming advisors can bring significant value to the table when it comes to listed REIT guidance.
That’s crucial at a time when the near- to medium-outlook for some corners of the REIT realm is murky at best. Additionally, some REIT income opportunities stand taller than others. That includes mortgage REITs, or mREITs. Good news for advisors: This isn’t a complex asset class.
mREITs provide financing for real estate projects and they do that by transacting in the mortgage-backed securities (MBS) – a vast corner of the broader bond market.
For mREIT Exposure, MORT Matters
mREITs are accessible in a variety of forms, including via exchange traded funds. The VanEck Mortgage REIT Income ETF (MORT) is the stalwart of the group.
“Mortgage REITs give investors a simple way to tap into the real estate market without having to own, operate, or finance properties themselves. Investors have historically found value in mREITs primarily because of their history of high dividends,” according VanEck research. “VanEck’s Mortgage REIT Income ETF (MORT) offers investor’s comprehensive exposure to the U.S. mortgage real estate investment trust market.”
On a superficial level, it’s easy to understand why clients would be attracted to MORT. The ETF sports a 30-day SEC yield of 13.35%. That’s hard to find across financial markets, particularly with a stock fund that devotes more than 70% of its weight to mid- and small-cap equities.
Of course, advisors should be able to convey to clients why MORT’s yield is so high and that while it’s not an indictment, it’s also not a sign of limited risk.
“Mortgage REITs tend to employ leverage and/or take on credit risk in non-agency MBS and commercial mortgage loans and securities to increase yield,” adds VanEck. “Beyond leverage and credit risks, high sensitivity to changes in interest rates, prepayment risk, and general real estate market risk are all factors embedded in mREITs yields. Investors attracted to the yield potential of mortgage REITs must also weigh the risks associated with such an investment.”
More MORT Advantages
Like the broader REIT realm, mREITs aren’t all the same. They vary by areas of investment and exposure to residential or commercial and agency or non-agency assets, among other differentiating factors.
And as is the case when it comes to REITs funds in general, diversification can work in clients’ favor when it comes to mREITs. That’s a luxury offered by MORT.
“However, generally MORT aims to provide broad exposure to mortgage REITs, so investors should expect to gain exposure to most areas of the mREIT market through the fund. Historically, about half of the exposure within MORT has consisted of residential focused mortgage REITs with the remainder a split between commercial mortgage REITs and multi-type mortgage REITs,” concludes VanEck.
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