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Mortgage REIT ETF’s 12% Yield Lures Big Buyer


Record trading volume in a mortgage REIT exchange traded fund on Wednesday suggests an investor scooped up a large chunk of shares in a fund that is currently yielding more than 10%.

Nearly 1.3 million shares of Mortgage REIT Income ETF (MORT) changed hands on Wednesday, which doubles the fund’s previous one-day volume record.

The trade appears to be a large block buy of MORT and would represent about 12 times the ETF’s average daily volume, according to WallachBeth Capital. If it is an inflow, the trade would drive a 25% increase in shares outstanding.

“The trade comes on the same day that MBA Mortgage Association announced a 1.2% drop in applications, having now dropped  six weeks in a row,” WallachBeth said in a note. The trading volume spike also follows a recent decline in the ETF as Treasury yields rose.

As of July 24, the mortgage REIT ETF held about $102 million in assets and paid a 30-day SEC yield of 12.23%, according to Market Vectors, the ETF unit of Van Eck Global.

The iShares Mortgage Real Estate Capped ETF (REM) is the other fund in the category. It yields 13.77%, according to manager BlackRock. The ETF is larger than MORT with nearly $1 billion of assets.

The mortgage REIT ETFs saw their share prices weaken in May and June as interest rates rose. [Mortgage REIT ETFs Slammed]

Mortgage REITs are “an increasingly popular but risky sector of the publicly traded real estate market,” writes Morningstar analyst Abby Woodham in a profile of REM.

“Not to be confused with equity REITs, which generate income by managing properties and collecting rent, mortgage REITs are financial firms that arbitrage the spread between the short-term interest rate and income from mortgage-backed securities,” she notes. “Mortgage REITs do not have access to deposit funding, so they rely on short-term loans like repurchase agreements.”

Rising interest rates are an important risk for the asset class.

“Mortgage REITs cut their distributions and performed poorly during past rising rate environments,” Woodham points out. “Because mortgage REITs are highly leveraged, they are very susceptible to interest-rate increases.”

Mortgage REIT Income ETF

Full disclosure: Tom Lydon’s clients own REM.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.