Van Eck announced the latest addition to its ETF lineup on Wednesday, introducing the Market Vectors Mortgage REITs ETF (MORT). The new fund will seek to replicate the Market Vectors Global Mortgage REITs Index, a cap-weighted benchmark comprised of companies that generate at least half of their revenues from mortgage REITs. That segment of the REIT market focuses primarily on buying and servicing commercial or residential mortgage loans, and has become a popular option for investors seeking out attractive distribution yields.
REITs In Focus
The new Mortgage REIT ETF will invest in about 25 different REITs, with the largest allocations going to Annaly Capital Management (about 20%) and American Capital Agency Corp (12%). The underlying index features a single company cap at 20% of total assets. As of July 31, the underlying index had an aggregate market capitalization of about $41 billion; about 20% of the fund is allocated to companies with market caps of $5 billion or more (i.e., large caps) while about half of the index is in mid cap stocks with market capitalizations between $1 billion and $5 billion.
With interest rates in the U.S. and many other developed economies expected to remain at or near record lows for the foreseeable future, yields on Treasuries and other investment grade debt have shrunk–and are showing no signs of reinflating. Many investors have embraced other asset classes as sources of current return; everything from dividend-paying stocks to MLPs to international debt has seen a surge in interest [see Dividend ETF Special: 25 High Yielding Ideas].
REITs have also become a popular destination for investors seeking to generate current returns, since tax regulations encourage significant distributions. In order to qualify as a REIT, a company must derive at least 75% of its revenue from real property sources (including interest from mortgages) and must also distribute at least 90% of ordinary taxable income to shareholders. Mortgage REITs are different from traditional equity REITs that make up many of the products in the Real Estate ETFdb Category. Instead of owning and operating physical real estate, mortgage REITs issue mortgages or acquire loans and other mortgage-backed securities.
Given the ongoing anxiety over the health of the U.S. mortgage market, as well as the heightened sensitivity to interest rate changes that results from the use of leverage, mortgage REITs can be risky investments. But they are also capable of generating impressive returns to investors looking to beef up the current income portion of their portfolios; as of July 31, the dividend yield on the underlying index was greater than 14%, an impressive rate that dwarfs yields on most fixed income products. It isn’t uncommon for mortgage REITs to leverage up to seven or eight times their capital, allowing for significant distribution yields.
“Yields from mortgage REITs have been higher in recent years than those provided by equity REITs and a number of other income-oriented products,” said Jan van Eck, Principal at Van Eck Global. “We’re pleased to bring out MORT, an ETF which we think could be a valuable portfolio building tool for yield-focused investors in this low-yield environment.”
Mortgage REIT ETFs
iShares already offers the FTSE NAREIT Mortgage REITs Index Fund (REM), a fund that focuses on U.S.-listed REITs with a focus on mortgage-related securities. Annaly Capital Management makes up nearly a quarter of REM, which had a 30-day SEC yield of nearly 11% and a 12-month yield of 10.4% at the end of July. REM lost more than 40% of its value in 2008 as markets cratered, but posted solid gains in both 2009 and 2010.
The new ETF from Van Eck will charge an annual expense ratio of 0.40%, undercutting REM by eight basis points. The top holdings of the two funds will be generally similar; the top three components of each, which account for a significant portion of total assets, are identical. REM has about 50 holdings, compared to 25 for MORT. About a quarter of the assets of REM are in banks and other financial institutions; MORT is more of a “pure play” on the mortgage REIT space.
MORT is the 36th ETF offered by Van Eck, and the tenth product in the lineup of income-focused funds. Last month Van Eck introduced its CEF Municipal Income ETF (XMPT), and the company also offers a high yield muni bond fund (HYD) that is among the highest-yielding fixed income ETFs available.
Disclosure: No positions at time of writing.