As yield has become a major investing theme in recent years, ETF issuers have started to develop intricate strategies to help investors capture handsome dividends. Introducing leverage to the dividend world allowed for a number of issuers to put out products that yielded in excess of the double digit mark, with one even breaking through the 20% barrier. The ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL, n/a) was the first fund of its kind and offers one of the most jaw-dropping dividend yields you will ever come across [for more ETF news and analysis subscribe to our free newsletter].
MORL in Depth
MORL is structured as an ETN, meaning that it will never incur tracking error, but as it’s a debt instrument it is at the mercy of the credit risk of its issuer (UBS). It was the first product in the ETF space to offer a 200% leverage on the highly coveted REIT space, where companies are known for distributing a high percentage of their earnings, making for strong dividends.
The first thing investors should note is that MORL is a monthly leveraged product, whereas the majority of leveraged ETFs offer a daily reset. In short, the fund seeks to double the performance of its index over the course of a month, not a single trading session. Though it may seem like a minor difference, it can make a large impact over the long haul [see also Reviewing Three Different Types Of Leveraged ETFs].
As with any leveraged fund, MORL comes with its fair share of risks. The 200% leverage can lead to some nasty spills if the underlying index is losing ground (though it can also produce strong gains in a bull market). The fund will be quite volatile from day to day (demonstrated by the chart below), as it is not uncommon to see MORL move by 1% or 2% in a single trading session; its best trading session ever watched it jump 9.8%.
The most alluring feature of this ETN is without a doubt its dividend, as its 12-month yield currently sits just below 24%. Because of its 200% leverage, MORL receives twice the dividend payment from each of its REIT holdings, which as noted above, have high dividend payouts on their own. Along with holding a monthly leverage, MORL also pays out its dividends on a monthly basis. The manner in which it pays out its dividends can be confusing for those who do not recognize the pattern.
Every three months (typically January, April, July, and October), MORL makes a significant dividend payment, while the two months in between typically feature a much smaller payout. The lion’s share of the dividend payout will come on those four months, while the off-months feature more reserved payouts. The chart below displays the 12 payouts MORL made in 2013, helping to better illustrate its dividend pattern for investors.
All in all, MORL’s leverage makes it a risky option for a long term hold, but for those who can handle the volatility, you will be rewarded with one of the largest dividends available in the ETF world.
Follow me on Twitter @JaredCummans.
[For more ETF analysis, make sure to sign up for our free ETF newsletter]
Disclosure: No positions at time of writing.