2023-11-10 13:54:15 ET
Summary
- Housing market may face trouble due to high mortgage rates and a potential recession, making iShares Mortgage Real Estate Capped ETF a risky investment.
- The REM ETF offers high dividend yield, exposure to U.S. real estate sectors, and strong liquidity, making it attractive for income-focused investors.
- However, REM's portfolio mainly consists of high-risk mortgage REITs, is sensitive to interest rate fluctuations, and has concentration risk.
I still maintain my belief that housing is in trouble. It's only a matter of time until consumer stress seeps into home buying against high mortgage rates and potential surging unemployment during a potential looming recession. The macro backdrop alone is why I personally wouldn't invest in the iShares Mortgage Real Estate Capped ETF ( REM ) now. Having said that, it's still worth a look as a signal for what may be to come in the broader market.
REM, managed by BlackRock Fund Advisors, seeks to duplicate the performance of an index composed of U.S. Real Estate Investment Trusts (REITs) that hold residential and commercial mortgages. It provides targeted access to a subset of U.S. real estate stocks and REITs, offering exposure to both residential and commercial mortgage real estate sectors.
The fund's asset under management stands at over $540 million with an expense ratio of 0.48 percent, making it a cost-effective way to access the mortgage REIT space. Cost-effective or not, though, I think mortgage REITs are problematic.
Investment Premise: The Pros and Cons
Pros:
- 1. High Yield : REM is known for its high dividend yield, which averages in double digits. This makes it an attractive choice for income-focused investors.
- 2. Exposure to U.S. Residential and Commercial Mortgage Real Estate Sectors : The fund gives investors targeted exposure to a specific U.S. real estate sector, providing a diversification option for their portfolios.
- 3. Strong Liquidity : With an average trading volume of more than 500,000 shares and a low 30-day median bid/ask spread, REM offers robust liquidity to investors.
Cons:
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High Risk : REM's portfolio comprises mainly mortgage REITs, or mREITs, known for their high-risk profile due to their reliance on leverage.
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Interest Rate Sensitivity : Mortgage REITs are sensitive to interest rate fluctuations. A hawkish Federal Reserve and high interest rates inject volatility into the mREITs market.
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Concentration Risk : REM's portfolio is top-heavy, with the top 10 holdings accounting for almost 70% of its total weight. This concentration can lead to significant volatility and risk.
Overview of the Fund
Launched on May 1, 2007, REM tracks the FTSE Nareit All Mortgage Capped Index, which measures the performance of companies engaged in the business of commercial and residential mortgage real estate, mortgage finance, and savings associations. The index is considered a reliable benchmark for U.S. mortgage REITs.
The fund has consistently paid quarterly dividends, making it a preferred choice for investors seeking regular income. Despite the high dividend yield, REM's total return performance has been less impressive due to the volatility of the underlying assets and the impact of interest rate fluctuations.
Details on ETF Holdings
As of the end of Q3 2023, REM held 32 stocks, with the top four positions comprising more than 48% of the portfolio. The notable holdings include:
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Annaly Capital Management, Inc. ( NLY ) : With a 16.33% portfolio weight, it's the largest holding. NLY invests in and finances residential and commercial assets.
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Starwood Property Trust, Inc. ( STWD ) : It's the second-largest holding with a 10.02% weight. STWD focuses on originating, acquiring, financing, and managing commercial mortgage loans and other commercial real estate debt and equity investments.
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AGNC Investment Corp. ( AGNC ) : AGNC, with a portfolio weight of 9.86%, invests in agency residential mortgage-backed securities on a leveraged basis.
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Rithm Capital Corp. ( RITM ) : It occupies 7.87% of the portfolio. RITM is a real estate finance company that originates, acquires, finances, services, and manages small balance commercial loans.
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Blackstone Mortgage Trust, Inc. ( BXMT ) : With a 4.68% portfolio weight, BXMT primarily focuses on senior mortgage loans collateralized by commercial real estate.
Peer Comparison
When compared to similar ETFs like VanEck Mortgage REIT Income ETF ( MORT ), REM has a competitive edge due to its high dividend yield and strong liquidity. Both have largely performed the same however.
Conclusion: To Invest or Not to Invest?
Investing in REM comes with both potential rewards and risks. The fund's high yield and exposure to the U.S. residential and commercial mortgage real estate sectors make it an attractive choice for income-focused investors IF we don't have a meaningful slowdown economically. I find that unlikely.
Considering the potential stress in housing with ongoing consumer weakness, my current stance on iShares Mortgage Real Estate Capped ETF is neutral. I think it's a good fund to track for potential stress, but not one to track your own money with right now.
For further details see:
REM: In The Wrong Part Of The Cycle