NYSE What’s The Fund – Mortgage REITs with Brandon Rakszawski
December 22, 2020
Watch Time 5:28 MIN
Douglas: Hi, everyone. I’m Douglas Yones. I’m actually live from the New York Stock Exchange’s library at the corner of Wall and Broad Street. And I’m joined today by Brandon Rakszawski. Now, Brandon is the director of ETF Product Development at VanEck. Brandon, thank you very much for being here with me today.
Brandon: Thanks for having me. Glad I could be here.
Douglas: So, I wanted to start right out of the gate with mortgage REITs. You know, we talk about this sector quite a bit, we hear about it on CNBC. How do they compare/contrast against traditional income investments?
Brandon: You know, mortgage REITs are a relatively small segment of the broader income markets, but they are involved very heavily in a pretty large slice of traditional bond markets, which is the mortgage markets. Mortgage REITs, investors in mortgage REITs generally access mortgage REITs through their common stock. And due to that, mortgage REITs are generally susceptible to equity market risk, which is certainly different than traditional bond investments and income investments. So, there is that equity market risk element, and there’s other inherent structural aspects with mortgage REITs that investors should be aware of, such as leverage risk, etc. But really, the minimum requirement for an income investor is an income stream. And mortgage REITs have certainly delivered these historically with a very attractive yield, which is generated by accessing mortgage markets—you know, agency, non-agency mortgage-backed securities, etc., etc.
Douglas: So, you mentioned generating income and for an income investor. Could you dig a little deeper? How is it mortgage REITs generate their income?
Brandon: Yeah. So, you know, first and foremost, REIT is in the name. So, real estate investment trust. So, structurally, mortgage REITs have elected REIT tax status from an IRS tax [inaudible 00:01:48] perspective. And in order to qualify as a REIT, REITs must distribute at least 9% of their taxable earnings to shareholders each year to be afforded other beneficial tax treatment. So, that inherently, the structural component of being a REIT, lends itself to an income-generating business model.
To take it a step further, mortgage REITs generate their income by participating in the mortgage markets, Primarily of the mortgage REITs that are very well-known to investors, the largest mortgage REITs, will invest in higher credit quality mortgage-backed securities—those that are issued by agencies of the US government, so that implied full faith in credit of the US government from agencies like Fannie Mae are accessed by these large mortgage REITs. And in order to increase the income opportunity, the yield profile of their actual mortgage REIT shares, they will employ leverage. So, borrowing at low rates on the short end of the curve, and investing in mortgage-backed securities. You know, a lot of them do that several times over to generate the attractive yields that they have done historically.
On the flip side of the coin, some mortgage REITs will dial back leverage or avoid leverage all together and try to enhance their yield opportunity set by accessing more credit risk or credit profile. So, non-agency mortgage-backed securities, some commercial mortgage-backed securities, or even commercial loan obligations, or loan origination may be undertaken by many mortgage REITs in the marketplace. So, there’s this mix of leverage and credit risk by each individual mortgage REIT to generate the attractive yields. Now, the yields have been attractive. And anything that pushes double-digit yields in the case of many mortgage REITs which have seen 10% or greater yield profiles, there is inherently risk associated with an asset class of that yield. So, investors should certainly be aware of the leverage and credit profile of the underlying exposure that they’re accessed.
Douglas: And Brandon, for an investor, is there a cost-efficient way that they can get access to the mortgage REIT market?
Brandon: Yeah. So, VanEck offers the VanEck Vectors Mortgage REIT Income ETF, trading under the ticker symbol MORT, listed at the NYSC. And it has been available to investors since 2011, so certainly not a new investment option. It’s something that’s been around. But, you know, in this environment that we’ve been in for well over a decade, where investors are increasingly searching alternative yield opportunities, mortgage REITs have become a popular alternative to those investors. And accessing the mortgage REIT market through the ETF wrapper affords a level of diversification that you wouldn’t otherwise get by owning individual mortgage REIT issues. So, we believe that’s attractive through the ETF trading under the ticker symbol MORT, or MORT.
Douglas: Well, thank you very much, Brandon, for joining me virtually today. I’m Douglas Yones. I’m live from the New York Stock Exchange, the home of ETS.
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