The Lizard King is cutting to the chase this Wednesday and detailing how much you can make on today’s recommendation first.  ACTION TO TAKE: BUY UBS ETRACS Mthly Py 2xLvg Mortg REIT ETN (MORL) UP TO $21.00.  This is a “hold forever” security so there will be no trailing stop to follow.  If you get in at today’s close price you can expect to earn about 20 percent annually for decades.  Based on most recent quarter of distributions the indicated current annual yield is 23.85%.  Seriously, that is not a typo.

You may be thinking it sounds too good to be true.  Let me explain.  MORL is an ETN composed of a basket of mortgage Real Estate Investment Trusts (mREITs).  These are companies in the real estate sector that are using a tax strategy that allows them to pay no corporate taxes so long as they pass on substantially all free cash flow.  So source one of the high distribution is a legally mandated high payout ratio that is tax advantaged.

Source two of high yield is clever manipulation of the yield curve.  You see, ordinarily interest rates are higher on long term debt than on short term debt.  This opens and opportunity for savvy players to borrow money short term and buy up long term debt that pays more than the short term debt service.  (There is some risk from rising interest rates but hedging interest rate risk is the primary thing these firms do.)  Like a bank, they leverage their equity to earn a few percent spread several times over.  Most of the underlying securities are currently yielding over 10%.

The third source of high yield is that UBS operates this vehicle as an Exchange Traded Note (ETN).  The fund is leveraged two to one (minus a 0.40% annual fee) so that each dollar invested collects twice the normal yield on the underlying securities.  Ordinarily, raptors have to be wary of leverage (it can kill!)  This use of leverage is slightly different though as we will have no margin debt in our brokerage accounts and cannot receive a “margin call” so long as we don’t get crazy and buy an already leveraged product ‘on margin.’

The underlying securities are the biggest most respected names in the mREIT business and the top ten securities, making up over 65% of the notes holdings are below:

Security Allocation
Annaly Capital Management Inc 15.33%
American Capital Agency Corp 12.83%
Starwood Property Trust Inc 6.46%
Chimera Investment Corp 5.14%
MFA Financial Inc 5.10%
Two Harbors Investment Corp 4.95%
Northstar Realty Finance Cor 4.60%
Invesco Mortgage Capital Inc 4.45%
Hatteras Financial Corp 3.91%
Newcastle Investment Corp 3.54%

I get the above yield estimate from the last three month’s distributions of $0.949, $0.1316, $0.1206, annualized to $4.8048.  Versus an imputed cost basis of 20.15: 4.8048/20.15 = 23.85%.  The yield will rise and fall over time as the note re-balances its holdings monthly and the yield on the underlying securities changes from time to time based on prevailing market forces.  But if you get in at today’s closing price, it is reasonable to expect decades of yields over 20%.  Raptors that DRIP their distributions will do even better!   I’ll be tracking performance for purposes of the blog based on today’s price of 20.15 instead of my personal purchase price from over a year ago.

Devour your prey, raptors!

Leveraged income without options or margin debt (MORL)

Never miss another opportunity to devour prey!

12 thoughts on “Leveraged income without options or margin debt (MORL)

  • February 1, 2015 at 9:24 pm
    Permalink

    This is an investment that is not for me at all. I’m not into any ETFs, nor leveraged ETFs and especially not one that invests in mREITs. Still I wouldn’t dismiss it totally and I would take a look but it does not follow my investment profile at all. I appreciate you bringing it to our attention. Thanks for sharing.

    Reply
    • February 2, 2015 at 3:25 am
      Permalink

      DH,

      We all ultimately have to go with what lets us sleep at night. A few extra points of yield isn’t worth emotional grief. Thanks for stopping by.

      Reply
  • February 25, 2015 at 9:51 pm
    Permalink

    Thanks for making me aware of MORL. I have bought it, along with CEFL 2 weeks ago in my 401k. What do you think of its cousins, BDCL, MLPL, DVHL and LMLP ? Do you also use the unleverageds, ie REM, PCEF OR YYY OR BDCS, AMLP ETC. I am planning to limit the high yield portion to 10-15% max of my 401k . What about other muniCEF funds or equity CEfs with buy write strategies and constructive ROC ?
    Any thoughts on MAIN/HTGC/TCPC/PFLT vs PNNT/PSEC for mreits ?
    Do you drip MORL ?
    Thanks

    Vish

    Reply
    • February 26, 2015 at 12:28 am
      Permalink

      You are welcome!

      I hold a small amount of BDCL and do not plan to add more at this time. In an account at Wells Fargo that does not allow MORL, I have a small amount of REM. I am not familiar with: MLPL, DVHL, LMLP, PCEF, YYY, BDCS, AMLP. I sometimes buy other CEFs but caution you that you should ALWAYS check the current NAV before buying. Never pay a premium on a closed end fund! I don’t recognize the others you mentioned except PNNT which I have examined and come close to buying before but have never held.

      I am semi-retired and depend on my distributions and options income to meet expenses, therefore I do not DRIP any of my holdings. I’d be hesitant about DRIP with MORL as you could quickly end up over-allocated at 20% or so annual compounding.

      Reply
  • February 25, 2015 at 9:54 pm
    Permalink

    Sorry, forgot to ask, do you use stop losses on MORL and other 2x leveraged ETNs ?

    Reply
    • February 26, 2015 at 12:23 am
      Permalink

      I use a very wide 33% stop loss on MORL and that is after distributions. I am down on capital losses quite a lot but my distribution income has more than made up for it. This becomes more true over time as the price has stabilized and distributions continue to pad my returns.

      Reply
  • March 25, 2015 at 11:38 pm
    Permalink

    MORL and BDCL both have leverage that can go UP of rates go up. Please keep that in mind. BDCL is the better choice since most of the BDC loans are tied to a spread over Treasuries and do adjust.NOt so with the mortgage REITS where the yield is fixed medium to longer term while their borrowing rate can go up and thus get squeezed. It is thus NOT correct that you can collect 20% forever. The distributions can drop like a lead balloon and so can your capital.

    Reply
    • March 26, 2015 at 12:03 am
      Permalink

      Herby,

      You make very solid points. I am banking on the fact the mREITs are composed of people who managed interest rate risk for a living and have an expectation they have good hedges in place. I also expect rates to rise slowly and not spurt right up to 15% overnight (catastrophic for everyone, not just mREITS!) I hold a small amount of BDCL as well.

      For variable interest rate investing I also happen to like (and hold) JRO, which invests in senior and secured variable debt. It yields almost 8% for me and I expect that to increase once the Fed starts letting rates rise.

      Thanks for reading and commenting. Devour your prey!

      Reply
  • October 28, 2015 at 2:08 am
    Permalink

    How is this one working for you right now? Share price is gettinf crushed and dividend has been readjusting

    Reply
    • October 28, 2015 at 1:02 pm
      Permalink

      I’m down 46% in unrealized capital losses and up net 6.25% after distributions. I plan to hold this one to maturity and will recover all my cost basis at some point. Not sweating it.

      Reply
  • January 20, 2016 at 5:56 pm
    Permalink

    how you doing with MORL, is getting smackeddd….

    Reply
    • January 20, 2016 at 6:49 pm
      Permalink

      I’m now in the red even after dividends. The whole mREIT sector is getting hammered. I think it makes sense for some slippage with interest rates rising but the severity of the current selloff puzzles me.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.