UBS continued to expand its suite of income-oriented products this week by debuting an ETN that will offer monthly leveraged exposure to an index consisting of mortgage REITs. The newETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) will offer 2x monthly exposure to the Market Vectors Global Mortgage REITs Index, a benchmark that includes companies such as Annaly Capital Management and American Capital Agency. That same benchmark is already linked to a Van Eck product, MORT, which offers non-leveraged exposure in an ETF wrapper.
25% Yield: Too Good To Be True?
Mortgage REITs have seen considerable interest in recent years, in large part because of the substantial yields they can offer. These companies provide real estate financing by issuing mortgages or purchasing mortgage-backed securitiesoften by using leverage in their day-to-day operations. In order to qualify as a REIT (and therefore for certain tax advantages) these entities must distribute at lease 90% of their taxable income to shareholders. That results in a payout ratio that is substantially higher than traditional equities. Combined with the use of leverage to purchase mortgage securities, this business strategy results in some substantial yields (van Eck has put together a useful document on the case for mortgage REITs).
MORL will use leverage to further enhance an already substantial yield, resulting in one of the highest payout ratios among all U.S.-listed ETPs. As of September 30, the 2x index yield was approximately 24.8%
The huge return opportunity offered by MORL will obviously come with some risks. Because mortgage REITs often leverage up in order to purchase mortgages, they can be extremely sensitive to interest rate changes. While mortgage REIT ETFs have been remarkably stable recently, there exists the potential for some volatility in turbulent or unpredictable environments. MORL adds explicit leverage on top of the capital structures of the companies that make up the index, amplifying the downside risk along with the upside potential and yield profile.
It is important to note that MORL will reset exposure on a monthly basis, meaning that the note will deliver 2x the return on the underlying index over the course of a calendar month. At the end of each month, exposure will reset, and the process will start over. So over periods of time either shorter or longer than a month, the returns realized by MORL may equal more or less than twice the change in the underlying index .
Under The Hood
The index to which MORL is linked consists of about 25 REITs. Annaly Capital Management (NLY) makes up the largest individual position at about 20% of total holdings. American Capital Agency Corp (AGNC) also makes up a meaningful slug at about 15% of the total index. As such, MORL will depend on two companies that combine to make up more than a third of the total index; any big movements in the price of those stocks will have a significant impact on the ETN's value.
Leveraged Yield ETNs
MORL is the latest in a suite of high yielding ETNs to debut from UBS in recent months. Among the 2x monthly leveraged products offered are:
- 2x Leveraged International Real Estate ETN (RWXL): 2x Index Yield = 7.6%
- 2x Leveraged Dow Jones Select Dividend Index ETN (DVYL): 2x Index Yield = 7.9%
- 2x Leveraged S&P Dividend ETN (SDYL): 2x Index Yield = 7.0%
- 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL): 2x Index Yield = 18.7%
- 2x Monthly Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL): 2x Index Yield = 10.7%
There are also a handful of products in the Leveraged Real Estate ETFdb Category that amplify exposure with a daily reset. Those include ProShares' Ultra Real Estate (URE) and Direxion's Daily Real Estate Bull 3x Shares (DRN).
Disclosure: No positions at time of writing.