Thanks to ultra low yields, investors were forced to look to
equities for their current income needs. While dividend-focused
investments in sectors like staples and utilities were and remain
popular, for truly outsized payouts many have looked to the
mortgage REIT market instead.
Securities in this segment are among the highest yielders in
the equity world thanks to their combination of leverage and real
estate holdings. In a nutshell, companies in this space obtain
loans and then utilize that capital for real estate investments.
But since they are still REITs, they must pay out at least 90% of
their earnings to holders in order to obtain favorable tax
Guide to 10 Great ETFs Yielding 7% or More
With this focus, many mREITs pay out double digit yields,
crushing broad Treasury bond markets and other dividend payers
quite handily in the process. While they can also be quite
volatile thanks to some serious interest rate risk and a
declining spread thanks to yield compression, they have been
decent performers thanks to a great deal of investors looking for
more high yielding securities for their portfolios.
Unfortunately, this was not meant to last as worries over the
further compression of the yield in Obama's second term really
pushed mREITs south over the past few weeks. Now that another
four years of his Presidency has been assured, many are looking
for a continuation of dovish central bank leadership and thus a
flatter yield curve.
This situation really hurts mREITs as their entire business
depends on a nice spread between their capital borrowed and the
rate of return on that money invested. When the rate of return
comes down-now thanks to lower ROI on real estate due to Federal
Reserve policies-it hampers the profit margin of mREITs.
Since they are using leverage for the most part, any small
decrease in profit margins can have an abnormally large impact on
their bottom line. So with another few years of dovish policies
seemingly assured, it could be a rough time for the space (see
Are QE3 and Mortgage REIT ETFs a Winning
This trend has sent prices for mREIT shares plunging across
the board with broad
targeting the space losing about 7% in the one month period that
ended a week after the 2012 U.S. Election. While it should be
pointed out that the S&P 500 was down about 4% in the same
time frame, the quick drop for the space and the new found
pessimism wasn't exactly great news going forward.
It Really Isn't That Bad
While the sector may not have the most robust outlook, fiscal
cliff worries could actually help the space. That is because
mREITs are already taxed at ordinary income so their tax levy
will only go up slightly. This compares to a possible tripling of
the dividend tax rate which could rise to as much as 44.8% if
lawmakers fail to reach a compromise.
If this happens, it will make many other securities with
robust payouts far less attractive and once again push mREITs to
the forefront of yield oriented investors' minds. The new taxes
could potentially cripple 'regular' income plays, push capital
back into the mREIT space and help end the sell-off in the market
Escape the Cliff with These Dividend ETFs
In fact, we are already seeing somewhat of a rebound in the
mREIT market over the past few days as investors are awakening to
this reality. After all, mREITs have clearly survived a low yield
environment for quite some time; it is hard to see how much more
compressed rates could get at this time, suggesting that for
investors with a longer time horizon the space could be ripe for
For those looking for a basket approach, there are several
mREIT ETFs on the market. Each of the three offer up double digit
yields and could be worth a closer look by investors seeking more
income without a great deal of tax risk at this time:
iShares FTSE NAREIT Mortgage REITs (
This is the most popular mREIT ETF on the market, with just
under $850 million in AUM. It is also a very frequently traded
one with just under one million shares a day in volume. The ETF
charges investors 48 basis points a year, holds about 30
securities in its basket, and tracks the FTSE NAREIT Mortgage
This results in a fund that has over 20% of its assets in
Annaly Capital (
and then another 16.5% in
American Capital Agency Corp (
, with the rest pretty well spread out among the remaining
stocks. Large caps account for just 38% of assets with small caps
accounting for pretty much the rest.
Obviously the yield is the real focus of this fund as the
30-Day SEC payout comes in at just under 12.1%. However, the
product has also been decent from a price perspective too, as the
ETF has added about 8.8% YTD (read
Three Impressive Small cap Dividend ETFs
Market Vectors Mortgage REIT Income ETF (
Another decent choice in the mREIT ETF space is Van Eck's
MORT, a product that does quite a bit less in volume but has a
respectable $90 million in AUM. The product does charge just 40
basis points a year in fees, although it has about five less
firms in its basket thanks to tracking the Market Vectors Global
Mortgage REITs Index.
This fund also puts a great deal of assets in NLY and AGNC,
although those two, respectively, receive, 18.2% and 14.2%
instead. This leaves a bit more for the rest of the mREIT space
which results in a slightly more spread out fund. Large caps make
up just 33% of this ETF, with the vast majority once again going
to small caps.
Yields are impressive in this ETF as well, as the 30 Day SEC
payout comes in at 12.15%, just edging out REM in this respect.
The fund has also beaten out REM from a price perspective too, as
the ETF has added a respectable 10.5% YTD (read
11 Great Dividend ETFs
ETRACS Monthly Pay 2x leveraged MREIT Index ETN (
The newest entrant in the space also tracks the Market Vectors
Global Mortgage REIT Index. However, this ETN utilizes two times
leverage that resets on a monthly basis for its exposure.
This results in a fund that is very volatile, although it also
hopes to be a big yielder. In fact, the expected yield comes in
at 24.8% per year, more than enough to make up for the 40 basis
point fee per year.
With that being said, investors should note that the product
is structured as an ETN so there is some credit risk from UBS,
although tracking error will not be an issue. Furthermore, during
the recent slump the product lost about 10% of its value, despite
having only been on the market for a month.
The ETN does, however, look to be a yield king as there are
pretty much no other products out there with a 20%+ yield like
this one. So for those truly starved for yield this could be an
interesting choice, especially if you have a tolerance for risk
and a belief that the mREIT space is due for a rebound.
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