2023-10-16 12:25:03 ET
Summary
- The VanEck Mortgage REIT Income ETF is difficult to justify in a portfolio due to high interest rates and a looming recession.
- The MORT ETF offers investors exposure to mortgage REITs, but its performance is heavily influenced by the dynamics of the mortgage market.
- Mortgage REITs are significantly affected by changes in interest rates, regulatory changes, and the overall health of the real estate market, posing risks for MORT's future performance.
We have this amazing ability to turn on the exactly same stress response worrying about a mortgage that a zebra does when it's sprinting away from a lion. - Robert Sapolsky.
There are some parts of the investable landscape which are no-brainers to buy, and no-brainers to not own at all. I think most would agree that with interest rates as high as they are, and with a recession likely looming, the risk/reward just isn't there for mortgage real estate investment trusts ("mREITs"). I personally agree with this, and that's what makes the VanEck Mortgage REIT Income ETF ( MORT ) hard to justify in a portfolio currently.
MORT: A Snapshot
The VanEck Mortgage REIT Income ETF aspires to mirror as closely as possible, before expenses, the price and yield performance of the MVIS® US Mortgage REITs Index ("MVMORTTG"). This index primarily tracks the all-around performance of U.S. mortgage real estate investment trusts.
Mortgage REITs are a type of real estate investment trust that offer financing for real estate through the acquisition or origination of mortgages and mortgage-backed securities. They specialize either in residential or commercial mortgages, and leverage various sources of funding. mREITs play a significant role in providing mortgage credit to homeowners and businesses, thereby injecting liquidity and credit into the housing market. Moreover, they finance real estate transactions that generate income. While mREITs are exposed to risks such as variations in interest rates and credit risks, these are mitigated through strategic hedging and modifications in assets and liabilities.
MORT offers investors an opportunity to invest in a variety of mortgage REITs. As of the third quarter of 2023, the fund held 27 different mREITs. Top holdings include large and well-known entities such as the Arbor Realty Trust, Ready Capital Corp, and Ladder Capital Corp. These companies are known for their significant exposure to mortgage investments.
MORT Against its Peers
When compared to similar ETFs in the market, MORT stands out due to its specific focus on mortgage REITs. While other funds might include a broader range of real estate investments, MORT's narrow focus allows investors to gain targeted exposure to the mortgage REIT sector.
However, this narrow focus comes with its own set of challenges. The performance of MORT is heavily influenced by the dynamics of the mortgage market, which can be volatile and influenced by factors such as interest rates, regulatory changes, and the overall health of the real estate market.
Historically, the yields from mortgage REITs have been higher than those of equity REITs and many income-oriented securities. As of the third quarter of 2023, MORT had a 30-Day SEC Yield of 14.27%, which is considered quite attractive by income-seeking investors. However, while the high yield is undoubtedly appealing, it's essential to recognize that the yield potential comes with a level of risk tied to the mortgage market's performance and the overall economic situation.
Understanding the Risk Factors
Mortgage REITs tend to be significantly affected by changes in interest rates. When interest rates rise, the value of the mortgage-backed securities held by these REITs tends to fall, which can lead to a decrease in the value of the ETF. Similarly, changes in regulatory frameworks can also impact the operations and profitability of mortgage REITs. Further, the health of the real estate market is a critical determinant of the performance of mortgage REITs. Any downturn in the market can adversely affect the performance of these REITs, thereby impacting MORT's value.
While MORT has shown some resilience in the face of rising interest rates and concerns about the real estate market's health, there are legitimate concerns about its future performance. In particular, the potential for a recession in the coming year could pose significant risks for mortgage REITs. During a recession, default rates on mortgages could increase significantly, which would likely lead to a drop in the value of the mortgage-backed securities held by the REITs in MORT's portfolio. This, in turn, would likely lead to a decrease in the value of MORT.
When we look at the chart, this doesn't appear to be on the verge of an uptrend at all.
A Prudent Stance: To Invest or Not?
Given the potential headwinds facing mortgage REITs and ongoing uncertainty in the economic environment, it may be prudent for investors to tread cautiously when considering an investment in MORT. While the high yield potential is undoubtedly attractive, the possible risks, particularly in the face of a potential recession, cannot be ignored. Investors looking for exposure to the real estate sector might want to consider other options, including equity REITs or other real estate-focused ETFs, which might offer a more diversified and potentially less risky investment opportunity. VanEck Mortgage REIT Income ETF is a pass for me - just seems like too much risk here.
For further details see:
MORT: No Real Compelling Case To Buy