2024-01-03 04:37:02 ET
Summary
- VanEck's Mortgage REIT Income ETF warrants a sell rating due to its poor performance, weak holdings, and high volatility.
- MORT has underperformed compared to peer REIT ETFs, with a low 10-year CAGR and the highest expense ratio.
- Several of MORT's holdings, including Annaly Capital Management, AGNC Investment Corp., and Blackstone Mortgage Trust, have red flags that could lead to a reduction in dividend yield.
Investment Thesis
VanEck’s Mortgage REIT Income ETF (MORT) warrants a sell rating due to its poor performance in comparison to peer REIT ETFs, its weak holdings, and relatively high volatility. While the fund provides a high dividend yield, its underperformance, and comparatively high expense ratio have resulted in the ETF being a sub-optimal investment.
Fund Overview and Compared ETFs
MORT is an ETF that seeks to track the performance of the MVIS US Mortgage REITs Index or MVMORTTG. This index strives to follow the overall performance of U.S. mortgage REITs. With an inception in 2011, the fund has 27 holdings and $254.68M in AUM. The fund is entirely focused on U.S. holdings in the financial sector.
While MORT is a mortgage REIT, other generic REIT ETFs are included for comparison purposes. These other funds utilized for comparison are Invesco’s KBW Premium Yield Equity REIT ETF ( KBWY ), Schwab’s U.S. REIT ETF ( SCHH ), and Vanguard’s Real Estate Index Fund ETF Shares ( VNQ ). KBWY is designed to track the KBW Nasdaq Premium Yield Equity REIT Index and has over 90% in small-cap holdings. SCHH attempts to track the general performance of U.S. REITs classified as equities. Finally, VNQ tracks the return of the MSCI US Investable Market Real Estate 25/50 Index .
Performance, Expense Ratio, and Dividend Yield
MORT has a 10-year CAGR of 2.70%. This is low compared to other peer ETFs examined: KBWY (10-year CAGR of 2.02%), SCHH (10-year CAGR of 5.18%), and VNQ (10-year CAGR of 7.34%). MORT has underperformed predominantly because of the weakness of several of its holdings. I will discuss more on this in further detail later. Additionally, MORT’s expense ratio is the highest compared to peer REIT ETFs examined at 0.43%.
10-Year Total Share Price Return: MORT and Compared REIT ETFs (Seeking Alpha)
MORT has a 12-year history of providing dividend payments. Its dividend yield is high, offering 12.18% over the past 12 months. However, the fund has seen a -4.93% dividend growth 10-year CAGR. Additionally, upon further examination of some of MORT’s holdings, there is reason to suspect that this fund will further reduce its dividend payout. Because a key positive advantage for MORT is its high dividend yield, any reduction in dividend payout will likely result in outflows for the fund.
Expense Ratio, AUM, and Dividend Yield Comparison
MORT | KBWY | SCHH | VNQ | |
Expense Ratio | 0.43% | 0.35% | 0.07% | 0.12% |
AUM | $254.68M | $238.76M | $6.55B | $59.97B |
Dividend Yield TTM | 12.18% | 7.90% | 3.24% | 3.95% |
Dividend Growth 5 YR CAGR | -3.79% | -7.30% | 1.75% | -0.22% |
Source: Seeking Alpha, 2 Jan 24
MORT Holdings and Its Competitive Advantage
MORT has the fewest holdings compared to peer ETFs at 27. KBWY, a fund that has also underperformed, has top holdings including Office Properties Income Trust ( OPI ), an office REIT, and diversified REITs like Global Net Lease, Inc. ( GNL ). Both these holdings performed poorly in 2023, dragging KBWY down.
In contrast to MORT and KBWY, funds SCHH and VNQ have strong holdings. These include industrial REIT Prologis, Inc. ( PLD ), healthcare REITs such as Welltower Inc. ( WELL ), and retail REITs like Realty Income Corporation ( O ).
Top 10 Holdings for MORT and Compared REIT ETFs
MORT – 27 holdings | KBWY – 31 holdings | SCHH – 124 holdings | VNQ – 163 holdings |
NLY – 13.50% | OPI – 8.39% | PLD – 9.56% | Vanguard Real Estate II Index Fund Institutional Plus Shares – 13.05% |
AGNC – 9.87% | GNL – 6.52% | AMT – 7.75% | PLD – 7.16% |
STWD – 9.30% | SVC – 4.77% | EQIX – 4.98% | AMT – 6.57% |
RITM – 7.65% | HIW – 4.57% | WELL – 3.91% | EQIX – 5.15% |
HASI – 5.12% | UNIT – 4.05% | CCI – 3.91% | CCI – 3.43% |
ABR – 4.98% | OUT – 4.00% | PSA – 3.78% | WELL – 3.01% |
BXMT – 4.88% | SLG – 3.92% | SPG – 3.65% | PSA – 2.76% |
RC – 4.08% | IIPR – 3.89% | O – 3.29% | DLR – 2.69% |
LADR – 3.65% | DEA – 3.74% | DLR – 3.20% | SPG – 2.67% |
ARI – 3.53% | GOOD – 3.63% | EXR – 2.66% | O – 2.58% |
Source: Multiple, compiled by author on 1 Jan 24
All ETF investors know that a fund’s future returns are tied to its individual holdings. While MORT does have a few favorable holdings, several others including its top holdings are not favorable. Included in further detail below are Annaly Capital Management, Inc. ( NLY ), AGNC Investment Corp. ( AGNC ), and Blackstone Mortgage Trust, Inc. ( BXMT ). All three of these have red flags that could drag MORT down, threatening a cut to its dividend yield.
NLY – Decreasing Dividend Yield
The first troubled holding for MORT is NLY. While offering a 13.4% dividend yield, the company has been slowly decreasing its dividend per share. Consequently, its share price has dropped 50% in the past 5 years. There are also some troubling growth and profitability indicators. First, NLY has seen a YoY revenue growth of -25%. In addition to its reduced revenue growth, the company has seen five consecutive quarters of increasing net debt. The last quarter of reported earnings (Q3 2023) saw -$516.78M in revenue and -23.76% in operating cash flow. This drop in cash flow and revenue indicates a warning sign that may result in further reduction of its dividend yield, negatively impacting MORT.
AGNC – Increasing Total Debt
The second difference in dragging MORT down is AGNC. This company saw -$369M in Q3 2023 revenue. Additionally, its total debt last quarter was the highest the company has seen since 2021. Finally, its YoY operating cash flow growth is -99%. As a result of these troubling metrics, AGNC’s share price has dropped 43% over the past 5 years. While it offers a high dividend yield of over 14%, its current payout ratio is 288%. Unfortunately, AGNC is not showing any promising growth or profitability leading one to speculate whether it will also contribute to a declining dividend payout for MORT.
BXMT – Declining Growth
The third holding that is concerning is BXMT. MORT has 4.88% weight on BXMT and this represents another unfavorable holding for the fund. First, the company reported a -71% net income growth last quarter. Additionally, its YoY return on equity growth is -52%. While BXMT offers an 11.66% dividend yield, its payout ratio is high at 211%. Despite the high dividend offering, BXMT’s share price has declined 33% the past 5 years. Therefore, this company is another example of a holding that will likely drag down MORT.
Valuation and Risks to Investors
MORT is currently trading at $11.76 at the time of writing this article. This current price puts the fund roughly in the middle of its 52-week price range ($9.40 to $14.06) and significantly below its all-time high price of $25.64 seen back in February 2020. Over 2023, MORT performed the worst compared to peer competitors with essentially no gain in share price.
One-Year Price Return: MORT and Peer REIT ETFs (Seeking Alpha)
Looking forward, MORT does indicate perhaps the most favorable valuation metrics. Its P/E ratio is the lowest among peer REIT ETFs at 12.48. Additionally, its P/B ratio is also the lowest at only 0.85. However, this should not be misconstrued as a favorable buying opportunity. The multiple red flags as seen with its holdings warrant a sell for me despite its high dividend yield.
Valuation Metrics for MORT and Peer Competitors
MORT | KBWY | SCHH | VNQ | |
P/E ratio | 12.48 | 54.51 | 34.58 | 35.0 |
P/B ratio | 0.85 | 1.02 | 2.19 | 2.2 |
Source: Compiled by Author from Multiple Sources, 1 Jan 24
Because of the negative growth, high debt, and declining cash flow of several of MORT’s holdings, I expect little to no increase in share price for the fund over the next year. Furthermore, I believe the fund is at high risk of reducing its dividend yield.
Despite weak share price performance, MORT has a 5-year monthly beta value of 1.59. This indicates a fairly high level of volatility compared to the overall market. However, not all REIT ETFs are as volatile. VNQ, for example, has a beta of 1.08 compared to the Dow Jones U.S. Total Stock Market Index, indicating much less volatility than MORT.
Concluding Summary
Despite offering a high dividend yield, MORT warrants a sell rating due to its lack of performance compared to peer ETFs. The fund has already shown signs of decreasing its dividend yield and I expect this trend to continue. Upon close examination of multiple of MORT’s holdings, there are several red flags including declining growth, increasing debt, and reduced cash per share. This will likely result in these holdings eventually reducing their dividend yield, ultimately dropping MORT’s overall dividend yield. Such an impact will also likely see a declining share price for MORT and investment outflows for the fund. Finally, MORT has the highest expense ratio of compared REIT ETFs and the highest volatility, as indicated by its beta value. For investors seeking REIT income and diversification, both SCHH and VNQ are favorable alternatives. These alternatives have lower volatility, lower expense ratios, higher performance, and more favorable holdings than MORT currently.
For further details see:
MORT: A High Dividend Yield Mortgage REIT, But With Red Flags