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Mortgages, Not Assets: How ‘REM’ Invests in Real Estate

Covid-19 has changed the real estate investment trust ( REIT ) landscape, particularly commercial property and office buildings. One REIT to consider focuses on mortgages rather than physical property: the iShares Mortgage Real Estate Capped ETF ( REM B ) , which is up 25% the last three months. “Mortgage real estate investment trusts (REITs) may sound intimidating, but their operating model is actually pretty simple,” a Motley Fool article noted. “These businesses borrow money at short-term lending rates and acquire assets that have a higher long-term yield.

Source: Mortgages, Not Assets: How ‘REM’ Invests in Real Estate

For mortgage REITs, we’re usually talking about mortgage-backed securities (MBSs). The difference between the yield from MBSs and the short-term borrowing rate is known as the net interest margin (NIM). The wider the NIM, the more money mortgage REITs make.”

At a 0.48% expense ratio, REM seeks to track the investment results of the FTSENAREIT All Mortgage Capped Index, which is composed of U.S. REITs that hold U.S. residential and commercial mortgages. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash, and cash equivalents.


The underlying index measures the performance of the residential and commercial mortgage real estate, mortgage finance and savings associations sectors of the U.S. equity market. REM provides investors with:

  1. Exposure to the U.S. residential and commercial mortgage real estate sectors
  2. Targeted access to a subset of domestic real estate stocks and real estate investment trusts (REITs), which invest in real estate directly and trade like stocks
  3. Use to diversify your portfolio and express a view on a specific U.S. real estate sector

In today’s low-rate environment, investors are seeking alternate sources of yield. One way is via REITs like REM.

“Furthermore, since REITs avoid the normal corporate income tax rate in exchange for paying out most of their profit in a dividend, they often have market-trouncing yields, ” the Motley Fool article added. “The iShares Mortgage Real Estate ETF had a trailing-12-month yield of 7.73%, as of Dec. 31, 2020. Even accounting for its 0.48% net expense ratio, you could double your initial investment in a decade on this yield alone with reinvestment.”

“Another interesting difference between mortgage REITs is their choice to hold agency or non-agency assets,” the article added. “Agency assets are protected in the event of default by the federal government, while non-agency assets aren’t. Not surprisingly, non-agency assets have higher yields, along with more inherent risk. The iShares Mortgage Real Estate ETF allows investors to blend these different mortgage REIT focuses.”

For more news and information, visit the Equity ETF Channel.