Investors Could Get Hurt By REM, and Other ETFs Impacted by Growing Short-Term Rates

In the last five years, artificially low interest rates have resulted in yield hungry investors being drawn to investments such as iShares Mortgage Real Estate Capped ETF, an exchange-traded fund that trades under the symbol REM. Since 2010, this ETF has gathered over $1 Billion in assets, in part because of its 14% dividend.

Unlike older and more traditional REIT ETFs, REM does not own companies that possess properties. Instead, the exchange-traded fund puts its money in financial firms that borrow at short-term rates and buy long-term mortgage securities while making a profit from the difference and passing that over as income. All this creates the 14% yield.

Unfortunately, with the increased likelihood of a Fed rate hike, the yield curve has started to become flat, reducing the spread that creates the 14% yield for REM. Also, short-term rates have started going up faster than long-term ones. The result has been that REM’s price has started to drop. And, if the central bank were to initiate a rate hike, that 14% yield and REM’s performance could end up in even more trouble. Bloomberg says that already REM has been down 5% since the Memorial Day weekend.

According to Shepherd Smith Edwards and Kantas Partner and Securities Fraud Attorney Sam Edwards, “Funds like REM seem very attractive to investors, especially when rates are so low. The risk of a fund like REM is far greater than traditional REIT investments and will suffer greatly in a rising interest rate environment. The vast majority of investors in funds such as this do not comprehend the risk of such a complicated strategy and find out too late they were taking more risk than was appropriate.”

Sadly, REM is not the only ETF that has drawn investors because of their high yield yet have hidden risks that most investors do not understand. Examples of exchange-traded funds that have investors have been gravitating toward because of their yields are the:

• Market Vectors Mortgage REIT Income ETF with its 10.8% yield • ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN, with its yield of over 27%

These ETFs, similar to REM, have much greater risk than a traditional REIT investment backed by real estate or mortgages.

At Shepherd Smith Edwards and Kantas our REIT attorneys and ETF fraud lawyers represent investors who sustained unnecessary losses from placing their money in a real estate investment trust or an exchange-traded fund that was not appropriately represented or suitable for the investor. We have helped thousands of clients recoup their losses caused by negligence or wrongdoing involving a financial representative or a firm. Call us today for a free, no obligation consultation if you have lost money in these ETFs or similar investments.