What is a mortgage REIT?

Introduction

A mortgage REIT is a special class of Real Estate Investment Trust or REIT that attempts to make money by holding mortgage backed securities rather than owning real estate. Their business model is typically to be highly leveraged, borrowing at short-term interest rates and investing in longer-term, higher paying mortgage backed securities. So they make money on the difference between short-term and long-term interest rates.

Our database currently contains 41 mortgage REITs that are traded on U.S. stock exchanges, with a total market capitalization of $53,925,592,397.   See our list of mortgage REITs.

All REITs, including mortgage REITs, are pass-through structures, which means they don't have to pay tax at a corporate level. To maintain their REIT status, they have to distribute all of their earnings to their shareholders to avoid tax at a corporate level. So mortgage REITs have higher than average dividend rates. As of today, the average dividend yield of the 41 mortgage REITs in our database is 13.32%.

Indexes

Mortgage REITs are eligible to be included in most popular large cap stock indexes like the S&P 500 Index and the Russell 1000 Index, but mortgage REITs are so small that they often do not meet the size requirements. For example, there are no mortgage REITs in the S&P 500 Index. Mortgage REITs are included in the S&P Smallcap 600 and Russell 2000 Indexes, but again, since mortgage REITs are small, they make up a small portion of these small cap indexes.

Here is the approximate weight of mortgage REITs in the Russell 1000 Index, an index that includes the largest 1,000 U.S. common stocks and REITs based on market capitalization:

Security TypeCountMarket Cap%
Common stocks935$34,447,930,720,42897.0%
Mortgage REITs4$26,156,408,3000.1%
REITs74$1,030,275,653,8682.9%
Total1,013$35,504,362,782,596100%

Here is the approximate weight of mortgage REITs in the S&P Smallcap 600 Index:

Security TypeCountMarket Cap%
Common stocks547$664,162,893,84891.0%
Mortgage REITs11$9,506,029,7761.3%
REITs44$55,964,569,6377.7%
Total602$729,633,493,261100%

In a way, mortgage REITs probably get more attention than they should, because there aren't that many of them, and they are relatively small. But their high dividend rates appeal to investors who are starved for yield during the past few years when interest rates have been really low.

Size Categories

Mortgage REITs on average tend to be small. Here's a breakout:

Category# of REITsMarket cap%Avg Dividend Yield
Large cap1$10,437,129,60019.4%13.0%
Micro cap11$1,277,298,7922.4%17.2%
Mid cap6$24,141,651,37544.8%12.0%
Small cap23$18,069,512,63033.5%15.0%
Total41$53,925,592,397100% 13.32%

As explained in our article size categories, there is no standard definition of what makes up a "large cap" stock. On our website, we use: Large cap > $10 billion, Mid cap between $2 billion and $10 billion, small cap between $300 million and $2 billion and micro cap <$300 million.

Performance of Mortgage REITs

How do mortgage REITs perform? Let's look at the market price performance of REM, the iShares Mortgage Real Estate Capped ETF, compared to SPY, the SPDR S&P 500 ETF:


In terms of price performance, mortgage REITs have obviously not performed very well during the past ten years. But the key to a mortgage REIT is the dividend rate. If you factor in the high dividends, then the total return of mortgage REITs is much better.

To truly analyze the total return performance of a security you must look at the market price of the security and you must include any dividends that that security has paid. One way we do that on our website is using total return symbols. Our total return symbols attempt to display in a chart the return of an investor, assuming the investor automatically reinvested any dividends in that security. Let's look at the total return of REM and SPY using our total return symbols:


Let's also look at the NASDAQ U.S. Mortgage REIT Total Return Index compared to the S&P 500 Total Return Index:


What is the effect of higher interest rates?

Mortgage REITs can have high dividend yields at times, but they can be difficult to analyze and understand, because of the effects of rising or falling interest rates on their business model. The "steepness" of the yield curve - i.e. the difference between short-term and long-term interest rates - is really important. Mortgage REITs are holding a large portfolio of mostly fixed rate mortgages and mortgage-backed bonds. If interest rates go up, the value of that portfolio will go down. But with higher interest rates may come a difference in the steepness of the yield curve. Many mortgage REITs also hedge their portfolios against rising interest rates in part by using swaps. So it is difficult to really understand what happens to a mortgage REIT as interest rates change.

One simple tool we use to analyze the sensitivity of an ETF to changing interest rates is to calculate the correlation between the ETF's market price and TNX, a CBOE index which tracks the yield on 10 year treasury notes. REM's correlation to TNX over its lifetime has been 72.19%. A positive correlation means that as TNX has tended to rise or fall, REM has also tended to rise or fall. Nevertheless, it is difficult to understand what will happen to mortgage REITs if interest rates rise.


ETFs that buy mortgage REITs

Probably because of the appeal of their high dividend rates, there are a handful of ETFs and ETNs that focus on mortgage REITs. Here are the ETFs that buy mortgage REITs or the ETNs that are linked to an index of mortgage REITs:

SymbolDescriptionMarket CapLeverage FactorActions
REMiShares Mortgage Real Estate Capped ETF$1,067,968,0001.00Analyze
MORTMarket Vectors Mortgage REIT Income ETF$183,180,0001.00Analyze
REMLCredit Suisse X-Links Monthly Pay 2xLeveraged Mortgage REIT ETN$120,912,7502.00Analyze

Note that several of these ETFs are leveraged ETFs. Mortgage REITs by definition use leverage to make money. So the idea of a leveraged ETF buying mortgage REITs that are already leveraged is a little bit scary.


All data is a live query from our database. The wording was last updated: 01/18/2019.

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