There is a very interesting new mortgage real estate investment trust investment which was just recently introduced by UBS (UBS). It is called "ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN" (MORL). It began trading on October 16, and it has already been volatile due to the recent market correction and because of concerns of pre-payment risk for the mortgage REIT sector. Mortgage REIT stocks in general are not for everyone, but this type of investment product does make sense for some investors and for a portion of an income portfolio. If you can stomach some occasional volatility that comes with investing in this sector and then some, it could really pay, thanks to an estimated dividend yield of about 25%.
Here are a couple of risk factors: One is pre-payment risk whereby homeowners refinance higher interest rates loans in favor of ones with lower rates. This is happening in some cases now due to the Federal Reserve's recent QE3 program. When higher rate mortgages are paid off, it lowers the net interest margin (profits) for mortgage REIT companies. However, low rates also benefit these companies because it means lower borrowing costs. Also, most mortgage REIT stocks are well off the 52-week high and the stock prices have now adjusted to reflect some pre-payment risk. Another risk factor is that mortgage REIT companies use leverage (or borrowed money) in order to achieve above average returns for shareholders. However, this investment product also uses leverage which is how it creates an even juicier yield. Now let's take a closer look at the holdings and some of the potential rewards:
Top holdings for ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN include:
1) Annaly Capital Management (NLY) which currently makes up about 19% of the fund's holdings. Annaly is a popular mortgage REIT with a current yield of about 13.6%. This stock was trading near 52-week highs of $17.75, but the recent correction in this sector has taken the stock price to $14.75.
2) American Capital Agency Corp. (AGNC) which currently makes up about 14.5% of this fund's holdings. This mortgage REIT yields nearly 16%, and at $31.66, it trades well below the 52-week high of $36.77. Insiders have been buying this stock. On November 13, Samuel Allan Flax (an officer) purchased 2,000 shares for about $59,500.
3) Two Harbors Investment Corp. (TWO) currently makes up about 5.2% of this fund's holdings. This popular mortgage REIT yields just over 13% and it trades about 10% below the recent 52-week high. This company recently announced a share buy back and insiders have also been buying on the recent pullback.
4) MFA Financial (MFA) currently makes up about 5.17% of this fund's holdings. This stock yields just over 10% and it still trades near the 52-week high. Part of the reason for this strength is because MFA Financial has significant exposure to non-agency mortgage securities which are less likely to see pre-payment risk.
5) Invesco Mortgage Capital (IVR) is another top holding with a weighting of about 4.7%. Invesco yields 12.8% and it trades near 52-week highs as well. This company also has a good portion of its portfolio in non-agency mortgage securities which are considered to be at lower risk for pre-payment. This means Invesco might be in a better position to maintain high profit margins.
Investors should consider the sector specific risks and the leverage risks of this new investment product. Investors who are already invested in this sector might want to put a few shares of this in their portfolio. While it is likely to be volatile, it certainly offers a yield to compensate. Even just 100 shares would set you back by just $2,400 and it could produce about $500 per year in dividends which is not bad at all in a world where it's tough to even get a 2% yield.
Here are some key points for MORL:
Current share price: $24.29
The 52 week range is $18.53 to $28.10
Earnings estimates for 2012: n/a on Yahoo Finance
Earnings estimates for 2013: n/a on Yahoo Finance
Annual dividend: estimated current yield of about 25%
Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.