What is a mortgage REIT?
Introduction
A mortgage REIT is a special class of Real Estate Investment Trust or REIT that attempts to make money by holding mortgage backed securities rather than owning real estate. Their business model is typically to be highly leveraged, borrowing at short-term interest rates and investing in longer-term, higher paying mortgage backed securities. So they make money on the difference between short-term and long-term interest rates.
Our database currently contains 38 mortgage REITs that are traded on U.S. stock exchanges. See our list of mortgage REITs.
All REITs, including mortgage REITs, are pass-through structures, which means they don't have to pay tax at a corporate level. To maintain their REIT status, they have to distribute all of their earnings to their shareholders to avoid tax at a corporate level. So mortgage REITs have higher than average dividend rates.
What is the effect of higher interest rates?
Mortgage REITs can have high dividend yields at times, but they can be difficult to analyze and understand, because of the effects of rising or falling interest rates on their business model. The "steepness" of the yield curve - i.e. the difference between short-term and long-term interest rates - is really important. Mortgage REITs are holding a large portfolio of mostly fixed rate mortgages and mortgage-backed bonds. If interest rates go up, the value of that portfolio will go down. But with higher interest rates may come a difference in the steepness of the yield curve. Many mortgage REITs also hedge their portfolios against rising interest rates in part by using swaps. So it is difficult to really understand what happens to a mortgage REIT as interest rates change.
One simple tool we use to analyze the sensitivity of an ETF to changing interest rates is to calculate the correlation between the ETF's market price and TNX, a CBOE index which tracks the yield on 10 year treasury notes. REM's correlation to TNX over its lifetime has been 73.75%. A positive correlation means that as TNX has tended to rise or fall, REM has also tended to rise or fall. Nevertheless, it is difficult to understand what will happen to mortgage REITs if interest rates rise.
ETFs that buy mortgage REITs
Probably because of the appeal of their high dividend rates, there are a handful of ETFs and ETNs that focus on mortgage REITs. Here are the ETFs that buy mortgage REITs or the ETNs that are linked to an index of mortgage REITs:
| Name | Symbol | Last price | Currency |
|---|---|---|---|
| iShares Mortgage Real Estate ETF | BATS:REM | 21.43 | USD |
| VanEck Vect Mortgage REIT Income ETF | ARCX:MORT | 11.01 | USD |
| ETRACS Monthly Pay 1.5X Leveraged Mortgage REIT ETN | ARCX:MVRL | 16.01 | USD |