Thursday, August 22, 2013

Bought a few more shares of REM


Today I bought another 100 units of iShares REM: iShares Mortgage Real Estate Capped fund. I've owned a little REM for some time now. I watched as it climbed slowly to more than $15 U.S., I believe. Today it had pulled back to $11.60 U.S. and I picked up a few more units. The threat of higher interest rates has investors in REM on the run.

I checked the ten biggest holdings in the ETF and when they all passed the sniff test I ordered a 100 units. Still, I am quite leery of the companies that make up the REM ETF: mREITS. Without getting too deeply into the complexities of this business model, mREITS, I believe generate income by buying mortgage backed securities with borrowed money at short term rates and then making loans at long term rates. The difference or rate spread is profit.

REM is one of those investments that is like a potent spice. A little REM gives a nice kick to one's dividend income. The important word here is 'little.' Keep REM as a small portion of a total portfolio and should it take a big tumble the loss is minimized by the lightness of the exposure.

Personally, I call REM high risk.
The outrageously high dividend and a business model filled with question marks, makes REM a high risk investment in my mind. Still, I like owning a little REM. A yield of 15.8 percent exerts a strong pull.

I'll return to REM and its position in my portfolio at a later date. If you'd like to know more about mREITS read the following from Zacks and for even more info click the link.

mREITs in Focus

"Unlike equity REITs, mortgage REITs do not hold properties, but invest mainly in mortgage backed securities (MBS) instead. These use short-term debt for financing their purchases and are usually highly leveraged.

"Securities in this segment are among the highest yielders in the equity world thanks to their combination of leverage and real estate holdings. But since these are REITs, a pay out of at least 90% of earnings to holders is mandatory in order to obtain a favorable tax treatment. With this focus, many mREITs pay out double-digit yields, handily crushing broad Treasury bond markets and other dividend payers.

"Thanks to this structure, mREIT offer up a very compelling risk reward play. That is because these REITs borrow capital at ultra low short-term rates, and then invest in potentially higher yielding real estate portfolios. Basically, securities in this segment often use leverage to make money off of the spread differential in rates while still paying out high yields to investors on a regular basis."

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