Thursday, January 16, 2014

Has REM found a bottom?


Has REM found a bottom?

As a retired fellow, I need cash. Some good stocks may be climbing in value but they do not pay an adequate dividend. Some ETFs are naturals in a "couch potato" type portfolio but they, too, don't pay a big enough dividend for a man in retirement. Think of iShares XIC.

So taking a page from the barbell portfolio approach, I have about one percent of my investments in iShares REM. I have written about this ETF in the past. According to its profile, REM attempts to track the investment results of an index composed of U.S. real estate investment trusts ("REITs") holding U.S. residential and commercial mortgages. I think of these as mREITs with the 'm' standing for mortgage.

Morningstar gives REM one star. I don't think its possible to have a lower rating. Morningstar also claims that REM has a low return. Yet, it's double digit yield has made it a nice addition to my portfolio. Today it is yielding 15.61 percent.

A mere $12,000 invested in REM pays a big enough dividend to balance my books for a month. $144,000 would pay me enough in dividends to get me through an entire year in retirement. I don't have $12,000 in REM. I could but I don't. REM is the extreme investment in my Barbell porfolio. It's yield is a nice shot of financial adrenalin but if it wilted I wouldn't lose sleep.

The other day MarketWatch looked at the mREIT market in an article by Ruth Mantell: The bear and bull cases for mortgage REITs in 2014. Mantell reports that investors sold off the group indiscriminately in 2013, and now there may be buying opportunities. Those aren't her exact words, for those read the article, I could not bring myself to be more positive about something that puzzles me so.

If REM, and the effect the ending of qualitative easing will have on the mREIT market, leaves you shaking your head in confusion, think of MORL, ETRACS Monthly Pay 2X Leverage Mortgage REIT ETN. (ETN stands for exchange traded note.) MORL is from UBS AG, a Swiss financial services company headquartered in Basel and Z├╝rich, Switzerland, but with tentacles reaching around the globe. MORL, like REM, is a mREIT based investment but thanks to leveraging is yielding 25.44 percent today.

Its profile says that this is an investment seeking to link to the Market Vectors® Global Mortgage REITs Index. The Securities are senior unsecured debt securities issued by UBS AG (UBS). The Securities provide a monthly compounded yield two times leveraged with a long exposure to the performance of the Index, reduced by the Accrued Fees.

In recent months MORL has had more of the stuffin' kicked out of it than REM. REM is down roughly 20 percent in the past year. MORL is down a little more than 30 percent. Both are huge drops when one remembers that the American market had a stellar year in 2013.

When I bought REM at around $11.50 I blogged about the purchase. I was betting REM was at or near a bottom. I was betting that I would make more in yield than I would lose on the dropping unit value. So far, the theory has been good. I'm well up on both the price of the units themselves and the big dividends are just gravy.

The question that I now must ask is: Has MORL found a bottom? For a look under the hood of MORL read the article by Michael Johnston on ETF Database: UBS Launches Mortgage REIT ETN With A 24.8% Yield.

In the past year, MORL has traded for 15 percent less than its present unit price. This gives me pause. REM, on the other hand, is within about 5 percent of its low for the past year and maybe of its all time low. There is an investment seminar coming up at TD Waterhouse downtown in London, Ontario, that will take an in depth look at ETFs. A fellow at the bank advised me to attend and bring along my questions about both REM and MORL.

The bank chap agreed both investments look appealing when used as little booster engines kicking one's portfolio yield up a notch. But the fellow at the bank, couldn't get his head around how exactly these two magic investments could crank up their yields well into the double digits without taking on totally unacceptable risk.


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