Investors looking for income-generating assets that serve as alternatives to bonds have been turning to real estate investment trusts (REITs) and the related ETFs this year. One name in that group to consider is the iShares Mortgage Real Estate ETF (REM).
The iShares Mortgage Real Estate ETF seeks to track the investment results of an index composed of U.S. REITs that hold U.S. residential and commercial mortgages. REM offers exposure to the U.S. residential and commercial mortgage real estate sectors. Investors get targeted access to a subset of domestic real estate stocks and real estate investment trusts (REITs), which invest in real estate directly and trade like stocks. The fund can be used to diversify a portfolio and express a view on a specific U.S. real estate sector.
With REIT ETFs, individuals can invest in an assortment of properties with one low-cost investment. Real Estate ETFs can be bought and sold like shares of stock on the stock market, and just like stocks, the companies that create and manage ETFs have to provide information to the public that helps investors decide if it is a good investment.
“We believe the upside opportunity in this product remains significant should the yield curve steepen for a sustained period,” Rareview Macro founder Neil Azous said in a note out Monday.
Rocking With REM
Declining interest rates have been a boon for REM. The fund has a yield north of 8%, making it sensitive to changes in interest rates and if the Federal Reserve cuts some more in 2020, REM could benefit.
Mortgage REITs have exhibited a negative correlation to interest rates changes, especially if the yield curve flattens. Many agencies use leverage to capitalize on the arbitrage spread between short- and long-term interest rates, so companies can still make money in a rising rate environment, as long as long-term rates rise faster than the short-term rate or if the yield curve steepens.
Mortgage REITs rely on short-term loans, so costs could rise if short-term rates suddenly spike. However, the negative effect of higher short-term rates could be somewhat offset by quickly rising long-term rates as mREITs benefit from a steeper yield curve and arbitrage the wider spread.
“In addition, the ETF’s holdings of credit-oriented mortgage REITs have benefited it this year as high yield credit has returned a ~12% gain alongside broad equity appreciation,” the Rareview Macro founder said. “We will likely carry this position into the New Year.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.