With hope building that the Federal Reserve will finally pare interest rates in September, some income investors are considering returns to high-yield, rate-sensitive asset classes. This includes mortgage real estate investment trusts (mREITs).
See Also: Some of the Top Growth Stocks Reside in this ETF
mREITs are accessible via exchange traded funds such as the VanEck Mortgage REIT Income ETF (MORT). MORT, which turned 13 years old last week, certainly fits the bill as a high-yield asset. A 30-day SEC yield of 12.26% confirms as much. That, coupled with its REIT exposure, explains why the fund struggled over the past three years, including the Fed’s most recent tightening cycle.
However, MORT’s performance has improved since the Fed’s last rate increase. With more investors seeking the benefits of real estate income without the risks associated with owning shares of property owners, mREITs could be ready for a renaissance.
Understanding mREIT Mechanics
Many investors are apt to see MORT’s 12.26% yield and be sold right away. Indeed, that’s an alluring trait, but it also pays to understand how mREITs make money. The primary source of income for mREITs, including those held by MORT, is interest generated on mortgage loans and interest generated from mortgage-backed securities (MBS) held in their portfolios.
The second component of mREIT income is capital gains. That means that when the REIT sells an asset appreciated in value, it enjoys capital gains, which isn’t as regular as interest income. Overall, mREITs balance income levels while mitigating risk.
“Mortgage REITs must balance pursuing high-interest income and potential capital gains with managing associated risks. This balance is key to sustaining profitability, especially in fluctuating economic conditions. Strategies include diversification of the mortgage portfolio, careful credit analysis, and hedging against interest rate changes,” according to VanEck.
Clearly, there’s a compelling income dynamic with mREITs and MORT. Investors who embrace the ETF or an individual mREIT get real estate exposure without the risks associated with property-owning REITs. Those are just a couple of the benefits associated with mREITs. Others include enhanced liquidity in financial markets, financing for real estate developers, and access to better mortgage terms for individual homeowners.
“Overall, the benefits of investing in Mortgage REITs extend far beyond simple financial returns. They play a critical role in facilitating access to real estate capital. This enhances liquidity in financial markets and provides investment opportunities tied to real estate market conditions without the associated management burdens. This makes mREITs an integral part of the financial landscape, offering unique advantages to various stakeholders,” concludes VanEck.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.
