How ‘REM’ Invests in Real Estate

Beth McCandry

Covid-19 changed the Real Estate Investment Trust (REIT) Landscape, especially commercial real estate and office buildings. One REIT to consider focuses on mortgages rather than physical property: the iShares Mortgage Real Estate limited ETF (SEM B.)which is an increase of 25% over the past three months.

“Mortgage Real Estate Investment Trusts (REITs) may sound intimidating, but their operating model is actually pretty simple,” said a Motley Fool article. “These companies borrow money at short-term borrowing rates and acquire assets with higher long-term returns. Mortgage REITs are typically mortgage-backed securities (MBS). The difference between the return on MBS and the short-term borrowing rate is called the net interest margin (Him). The wider the Himthe more money mortgage REITs make. “

With an expense ratio of 0.48% SEM tries to track the investment results of the FTSE NAREIT All Mortgage Capped Index composed of US REITs that hold US residential and commercial mortgages. The fund typically invests at least 90% of its assets in the constituents 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, mortgage finance and savings banks sectors of the US equity market. SEM offers investors:

  1. Exposure to the US residential and commercial mortgage real estate sectors
  2. Targeted access to a subset of domestic real estate stocks and real estate investment trusts (REITs) that invest directly in real estate and trade like stocks
  3. Use this option to diversify your portfolio and express an opinion on a specific US real estate sector

In today’s low interest rate environment, investors are looking for alternative sources of return. One way is through REITs like SEM.

“Because REITs avoid the normal corporate tax rate when they distribute most of their profits as dividends, they often achieve market-rate returns,” added the Motley Fool article. “The iShares Mortgage Real Estate ETF As of December 31, 2020, the 12-month return was 7.73%. Even with a net expense ratio of 0.48%, you could double your initial investment in a decade in just reinvesting that return. “

“Another interesting difference between mortgage REITs is their choice of holding agency or non-agency assets,” the article added. “The assets of the agency are protected in the event of a failure by the federal government, the assets of the non-agency are not. Unsurprisingly, assets outside of agencies have higher returns and higher risk. The iShares Mortgage Real Estate ETF allows investors to mix these different mortgages REIT concentrate. “

Further news and information can be found in Equity ETF Channel.