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REML: A Case Study Against Leveraged ETNs And Products


  • REML is a leveraged ETN, or exchange-traded note.
  • Structured leveraged products, including REML, consistently underperform, and are generally disastrous products.
  • An overview of REML, and of leveraged ETNs more broadly, follows.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
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Photo by DNY59/E+ via Getty Images

The Credit Suisse X-Links Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:REML) is exactly what it says on the tin: a 2x leveraged mortgage REIT ETN.

Leveraged ETNs such as REML are a bit of a niche product, but sometimes popular

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This article was written by

Juan de la Hoz profile picture

Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.


I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (90)

Buying thousands of shares at sub $3.00 currently at 83% return to a hit today however still above 77% I'll hang on, dividend this month is $2700+ Caveat: I watch like a hawk throughout the day
@DrBobE So it’s a full time job?
@JackCr Do you have one? Financial Adviser, Palm Reader?
@null yes,when you have a portfolio of etns its a full time job. You must watch like a hawk.. as far as your palm reader comment...etns are best traded with technical analysis. When Im up 20% on SMHB in one month, I sell 90% of the position even if it means forfeiting most of the coupon. You must monitor trading ranges..support and resistance levels..anyone who randomly throws money in an etn without looking at a chart to determine whether or not the etn is trading closer to its short term bottom range versus the high end of its range is being wreckless over a small coupon payment. .a payment much smaller than the capital gains you can obtain in a short period and the devastating losses if you view them as long term holds. For me, they are long term trades of buying low, selling high. Now Crédit Suisse commodity etns USOI,SLVO usually fluctuate + and - 5%,GLDI + or - 2-5% in a month giving you an opportunity to collect a huge coupon payment and small capital gain..and their coupon payments typically offset capital losses but then again its all a matter of entry price.
I held some of the leveraged ETNs heading into March 2020 and took significant, irreversible losses. Never again!
In reading many of the comments it seems to me that many people have forgotten that basic business wisdom says that leveraged investments should not be held for periods over 24 hr. I do not agree with this short out look. aHowever if I keep them it is always with the knowledge that I could lose it all. BUT then I might die overnight as well. BUY MORE!
Mr.Sir profile picture
@sedii all investments are leveraged to some extent. Cost of doing business.
rickylees profile picture
We need nly and agnc to raise divy
@rickylees Personally, with a lot of both, I "need" NLY and AGNC to be stable dividend machines, and pay out only what their BOD thinks prudent.
@rickylees NLY in particular seems to strive to be the boring one of the group, with lower leverage, lower risk, and lower returns. AGNC has been a little more high flying but has managed that a little with pure-play agency. There is some comfort that both were able to meet their margin calls back in late March when others had to sell it all at fire sale (looking at you IVR).
sjfaris profile picture
I agree with @ackwgoh. He and @Juan de la Hoz have made a great case.
I did some analysis of the divy payout as follows:
Total per month
2019 4.8431 0.404
2020 1.76 0.146
2021 0.4782 0.096

I am thinking that we will get $2-$3 Total for 2021 as we see May is 0.0541 more than double Feb div of 0.0178. I say buy now!!
@sjfaris yep. More raises and blue skies ahead. Oh, not saying that we will get to $2 for 2021, that would be about double what it is now, but I am theorizing that more component dividend raises could be on the way over time lifting this distribution even higher. We will just have to watch it all play out.
@sjfaris While I'm sure most readers sense my favorable view on REML, we need to be realistic. My last formal update of the data, about a month ago, showed quarterly distributions running at ~$0.27/quarter and $1.08 annualized. Again, the caveat, this is using component weights as of 12/30/2020.

There have been a number of very pleasing component distribution increases and I suspect (at least hope) there will be more - and soon. As a number of posts suggest, NLY (an ~18% position) and/or AGNC (~12%) would certainly move the needle upward. But even $2 for 2021 would be very much of a stretch in my view.

One final comment, and I believe this comment has already been mentioned by others, we should not read too much into the May vs Feb distribution increase. What often happens near year-end is several mREITs that would normally pay in Jan move the ex-date to Dec so the Jan coupon is higher and the Feb coupon is correspondingly lower. These shifts and the payments of specials of any type make it very difficult to extrapolate correctly using reported coupons; detailed component level work sheets are necessary.
Augustus profile picture
I may be possible to use some market timing to trade REML. When the price of the underlying ticker is increasing then REML will increase at a faster rate.

@Augustus Probably because REML uses 2x leverage.
Augustus profile picture
Of course it is because of the leverage. That is the entire purpose.

The chart can give you an idea of when to be invested in the uptrending market and when to exit as the trend ends. Chart does not include improved returns from the distributions.
jpmist profile picture
@Augustus Yep, I hit on a similar chart. REML historically trades at 40% - 50% the share price of REM, but it's now around 20%. That has to correct in REML's favor eventually. So while waiting for REML to double, you get paid a nice fat dividend.
Hope I can add a slightly different perspective. In determining whether you want to invest in REML (or any other similar instrument), my belief is investors should begin by examining the underlying holdings and determining whether they want to invest in them. If you have questions/issues, etc., with NLY, AGNC, NRZ, and other major REML components, your decision is made - avoid REML. However, if you like these names, go to the next step: understand exactly how REML works. Understand the costs, know how your payments are determined, etc. In fact, I would suggest "know" and "understand" are not strong enough. Since I like the mREITs (I would guess I like 70-80 of REML's components - probably 90% by weight), I model every quarter's coupons. To do that accurately, you have to have component share prices at the right date, component weights at the right date and then collect component dividend amounts with ex-dates. If you model accurately, up until the past few months - see below - you should be able to project REML's coupons very well - I am rarely off even a half penny. My initial projections for this quarter were $0.198 (April), $0.051 (May), and $0.02 (June) - very close so far. Monthly updates usually see only minor tweaks or a move of a component distribution from one month to another.

Note: What has happened recently - and Professor Lance reminds us every month of this most significant change - the component weights driving the pay-out calculations are now considered proprietary and are not disclosed - therefore our projections are less accurate as they are missing an important factor. Fortunately, when I look at the component weights published later, I see little notable change so using weights from several months ago will likely get you close - that is my experience anyway. But it is this lack of transparency into how our pay-outs are calculated that really concerns me. All the other so-called complexities, high expenses, etc. are clearly disclosed and can be easily understood. Do the cost-benefit analysis and use REML if you like the results.

My current REML assessment: as I have studied the REIT components of REML over the past year, my sense is I cannot buy enough shares. Now, there is certainly a lot of work involved in reaching that conclusion: studying many earnings reports, reading call transcripts, doing some modeling, etc. But, after the melt-down last March, my sense was we had an amazing opportunity here as these names were so beaten down, As expected, we saw a significant recovery. Most important in my view, I have been ~50% correct in calling component distribution increases by quarter - higher if you give me an extra quarter. I see many more increases this quarter and future quarters - my modeled coupons are growing. I like the results and outlooks for most the components and can accept REML complexities and costs.

Two final comments: First, judging from so many of the REML-related questions and comments, my sense is many investing in REML (and the others) simply have not done their homework, due diligence, whatever you want to call it. My sense is there is a significant shortfall in understanding what they have invested in - the author is clearly correct in pointing out how how risky this can be. Second, and my approach likely differs from many REML investors, I am not a long term buy and hold REML investor: too much can go wrong. I do a deep dive at least once each month - maybe twice - not into REML but rather the components. As a result, when I see changes in spreads, derivatives, and the like, I move in and out of significant numbers of REML shares. Also, tend to hold more for the big month coupons (moves up the reward in risk-reward) and less for the small month coupons. Finally, if I want to reduce my analysis effort, I reduce shares held. Leverage always adds risk and you must mange it.
Juan de la Hoz profile picture
Thanks for this fantastic comment @jackwgohs! Even though I dislike REML as an investment I think your strategy makes sense. These investments do (potentially) work if you do something like what you said, a monthly deep-dive into their holdings, expected coupons, etc., and constantly deciding if you want to keep investing or not. Long-term holding is not the best idea, but short-term opportunistic investments or trades can work.
@jackwgohs Exactly. I initially bought REML after the crash last year thinking that the component dividends and share prices would rise over time during the recovery. Later, I was eyeing NRZ as a possible buy but decided, hey, why not just buy more REML, and take advantage of the mReit recovery.
Lance Brofman profile picture
Leveraged ETNs such as REML and MVRL have various additional risks in addition to the rebalancing and acceleration risks. These additional risks are described in "Current REML Yield Now Above 16% And The Dividend Likely Will Increase". Rebalancing and acceleration risks were dramatically shown to pose the possibility of catastrophic losses to investors in leveraged ETNs, during the pandemic related market turmoil in 2020. As I discussed in: "Opportunities In The Remaining High-Yield 2x Leveraged ETNs", REML and some other 2X leveraged ETNs still exist because they have "Loss Rebalancing Event" provisions.

If an investor wished to maintain the same degree of sensitivity to a change in the ETN's net indicative (asset) value, they could buy enough additional shares of the ETN to bring up the sensitivity of the position. Likewise, selling some of the ETN position will maintain the degree of sensitivity to a change in the ETN's net indicative (asset) value that would result from a rebalancing that followed an increased change in the ETN's net indicative (asset) value.

For those who want to almost entirely eliminate acceleration risk with a leveraged mREIT ETN, without having to engage in any transactions to offset rebalancing, MVRL is a good choice. MVRL has only 1.5X leverage rather than the 2X of REML. MVRL does have "Loss Rebalancing Event" provisions. Most significantly, the high current price of MVRL makes any possibility of acceleration very remote in the foreseeable future.

One consideration discussed in: "Leveraged mREIT ETNs Offer Very High Current Yields" is liquidity. MVRL only started trading on June 3, 2020. It has extremely low trading volume. The 90-day average volume for REML is 718,947, as of April 23, 2021, which is relatively not that much, in today’s market environment. For MVRL, the 90-day average volume is only a miniscule 18,163. However, the Median Bid/Ask Spread as a percentage of the trading price, a measure of liquidity most relevant for small investors, is actually better for MVRL. As of April 23, 2021, the median Bid/Ask Spread (30 Day) for MVRL was 0.13%. For REML, the Median Bid/Ask Spread (30 Day) was 0.31%. It appears that UBS is supplying liquidity to MVRL.." seekingalpha.com/...
rickylees profile picture
Back up loadup
GearDownBigShifter profile picture
Bought it around 5 . I’m happy
REML has dropped significantly this week, apparently in response to "inflation fears", despite that the Fed will not raise rates for over 18 months, until the end of 2022 at the earliest. It is a huge buy in the $7 range, especially with the distribution going up quickly and securely.
You can't say REML won't recover when the recovery period is ongoing.
rickylees profile picture
@timcoughlin you our correct!
Thanks for this article. In my opinion this ETN has two problems for potential long-term holders: the high leverage and associated volatility, which you covered, and the fact that mREITs generally make poor long-term investments due to their interest rate sensitivity. At best, this might be a decent trading vehicle for people who are willing to watch it like a hawk.
Lance Brofman profile picture
@toromi Since a 2X leveraged ETN emulates a brokerage account where the investor is using 50% margin, there is the possibility of a negative net indicative (asset) value occurring. Unlike a brokerage firm, the issuer of a 2X leveraged ETN cannot go after the holders of the ETN if the net indicative (asset) value becomes negative. Thus, most 2X leveraged ETNs have acceleration provisions, which cause the ETN to return net the indicative (asset) value to the investor if the net indicative (asset) value falls to or below a specified level. This is analogous to what would happen if an investor did not meet a margin call and the account was liquidated. The investor would then have only what was left in the account after the securities were sold and the margin loan paid.

Acceleration, by itself was not the main problem with the many 2x leveraged ETNs in March 2020. However, rebalancing leverage only once a month, created tremendous increases in effective leverage during the March 2020 collapse. This was explained in 20% Current Yield Is Available From REML, But With Risks, which included:

Normally, rebalancing once a month would be sufficient to keep the degree of leverage near 2x. However, the drastic pandemic-related declines in securities prices caused a rapid increase in the degree of leverage. This caused REML to fall much more than twice the decline in REM and had even more extreme impacts on the relationship between UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN (MORL) and the VanEck Vectors Mortgage REIT Income ETF (MORT). MORT is an unleveraged ETF version of MORL and is based on the same MVIS US Mortgage REITs Index. Normally, REML would move up or down twice as much as REM. Likewise, MORL would move up or down twice as much as MORT. Thus, the 2x Leveraged ETNs emulated a hypothetical margin account that held the unleveraged ETFs, or a portfolio of mREITs with the same components as the unleveraged ETFs on 50% margin. UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN Series B (MRRL) was an identical twin to MORL.

The consequences of the extreme increase in leverage for the 2X leveraged ETNs was discussed in Opportunities In The Remaining High-Yield 2x Leveraged ETNs which included that if in between monthly rebalancings, the ETN's net indicative (asset) value, the effective leverage increases too much more than 2x.

There is a very small, but non-zero probability that REML goes to zero and will permanently disappear if the mREIT market collapses. The REML pricing supplement has a particularly scary provision that if the intraday indicative value of REML fall to zero it will remain at zero, i.e. be worthless. Ironically, that scary language actually worked to the investors' advantage, relative to what happened with the UBS 2x-leveraged ETNs that were redeemed at disastrously low prices, $0.21 in the case of MORL and MRRL. The “remain at zero” provision in the REML pricing supplement allowed CS to waive that provision and thus allow REML to survive. Thus, on March 20, 2020 CS issued a press release that said that even though the net indicative (asset) value of REML had touched zero intraday, CS suspended the application of the requirement that the intraday indicative value remain at zero..."
sjfaris profile picture
I got burned here also but had only a small exposure. One cannot plan for a black swan. Other sectors like oil, hotels cruise ships etc. got hit just as hard and credit suisse at least helped it survive.
To the author - I agree that on the face of it ETNs seem risky. But the rewards are commensurate, IMHO.

If you ask me if I would invest in REML - I absolutely would - since I foresee cap-gains + income.

To those who suffered during the pandemic crash - that was a black-swan event. I suspect, we may not see one again for a while. Only time will tell.

In the meanwhile, I'll take my chances on REML. In the last 12 months, the dividends paid out have been EXACTLY predictable - and REITs will only improve for the foreseeable future.
@DivInvest0r And the dividends of the constituent companies have been increasing as they recover, which increase our dividend. That was a part of my thesis for buying it later last year after the crash.
Lance has always talked about the the risk .. We don’t own reml for safety but the upside after It was Beaton down to a pulp.. divided and price appreciation are real.. I bought in at 1.27..while I could get wiped out, the payoff if it continues to move north is worth the risk ...
thumbsoup profile picture
$REML seems to be a "condition dependent" holding, as @jpmist mentioned.

I own a little. Part entertainment speculation, where my only risk control is each month I let the little $ distribution go to cash, not reinvested.
jpmist profile picture
@thumbsoup Thanks for the reinforcement and the opportunity to repost this link again -


Reading some of the comments it's clear many don't understand when mREITs work best. I wish the author had reviewed the chart linked above before writing his article. (BTW I have no affiliation with the site)

No one should ever buy any mREIT unless they understand exactly what that chart is showing you. It's pretty clear that our mREIT sell signal was back in 2016 and any time after 3/2020 has been a great time to get back in.
@jpmist where can I read about this chart and the inferences from it? Genuinely trying to learn here.
jpmist profile picture
@DivInvest0r Investopedia is a good start - www.investopedia.com/...

But my main point was to really look closely at the chart and figure the time frame where the spread between the 3 month and the 10 year was expanding. Then pull up AGNC or NLY dividends - seekingalpha.com/...
You'll see they did well in 2012 and 2013 just as the spread widened during then.

From 2014 to recently the spread was contracting so mREIT dividends were cut during those years. But the spread has been expanding dramatically since 2020 which foretells rising earnings from the mREIT sector and why I'm very bullish on REML
You captured all the issues.
You need to speak to forward issues, not history.
I’m up 78% from buy in 2020. I like that and it raised its distribution 35% as predicted by others.
rickylees profile picture
@jcmcapital that was a very rare pandemic experience if you in got Around April your way up
rickylees profile picture
It’s called stop loss may have prevented a lot of the loss
LovesCoffee profile picture
Finally! An honest appraisal of REML. I bought (after reading many glowing endorsements by an SA author with initials LB) before COVID hit and now, even with DRIP, am only down 67%. I am reminded of the old adage with the phrase "pigs get slaughtered". Lesson learned.

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