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REM: Mortgage Real Estate ETF Offering Instant Diversification And Yielding 9.68%

Published Mon, 23 Nov 2020 22:10:22 -0500 on Seeking Alpha

Seeking AlphaETF AnalysisREM: Mortgage Real Estate ETF Offering Instant Diversification And Yielding 9.68%Nov. 23, 2020 10:10 PM ET|| About: iShares Mortgage Real Estate Capped ETF (REM), Includes: AGNC, AGNCM, AGNCN, AGNCO, AGNCP, NLY, NLY.PD, NLY.PF, NLY.PG, NLY.PI, STWDby: Bram de HaasBram de Haas Special Situation ReportProfessional risk-taker focused on smart bets and risk control. SummaryI've been spending a little bit of time on mortgage REIT vehicles after the sector got distressed in March 2020.
I dabbled in some preferred bonds but found that the industry has attractive features that really complement my portfolio from time to time.
Although I've been looking at a lot of CEFs, I needed to look at the major mortgage REIT ETF.
What I found did not disappoint as it is an attractive basket of holdings that will benefit from a further virus rebound and offers a very high yield.
The iShares Mortgage Real Estate Capped ETF (REM) holds a basket of U.S. REITs that in turn hold U.S. residential and commercial mortgages. That may sound safe depending on whether you focus on the residential or commercial part, but in practice these companies are highly leveraged. The largest holding Annaly Capital (NLY) is levered 6.2x. In the March Covid drawdown, this fund got hammered into oblivion. Down over 60%+ at some point, it got a lifeline from the Fed, when it announced a willingness to buy an unlimited amount of mortgage-backed securities. As Covid wasn't as bad as it could have been in the summer, the sector started recovering from the value destruction (panic selling, etc.) that took place in March.
Data by YCharts
In practice, the leverage is not as problematic as the headline leverage number suggests because I'm not too concerned about the residential exposure which, in the case of Annaly for example, is covered by Fannie Mae (OTCQB:FNMA), Freddie Mac (OTCQB:FMCC) or Ginnie Mae.
Then this month Pfizer (PFE) came out with virus news that, at least... Read more