Mortgages, Not Assets: How the REM ETF 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), which is up 25{ac967ad544075fb2f6bcea1234f8d91da186cac15e616dc329e302b7c7326b8c} 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. 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{ac967ad544075fb2f6bcea1234f8d91da186cac15e616dc329e302b7c7326b8c} expense ratio, REM seeks to track the investment results of the FTSE NAREIT 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{ac967ad544075fb2f6bcea1234f8d91da186cac15e616dc329e302b7c7326b8c} of its assets in the component securities of the underlying index and may invest up to 10{ac967ad544075fb2f6bcea1234f8d91da186cac15e616dc329e302b7c7326b8c} of its assets in certain futures, options and swap contracts, cash, and cash equivalents.

The underlying index measures

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