UBS launches ETN with high income potential and leveraged exposure to mortgage REITs

Oct 30th, 2012 | By | Category: Alternatives / Multi-Asset

Earlier this month, UBS Investment Bank expanded its suite of ETRACS exchange-traded notes (ETNs) with the launch of a note that is linked to the monthly compounded 2x leveraged performance of a portfolio of mortgage real estate investment trusts (REITs).

UBS launches ETN with high monthly income potential and leveraged exposure to mortgage REITs

UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN launched with a mouthwatering indicative yield of  24.82%.

The UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL), which was listed on the NYSE Arca, tracks the Market Vectors Global Mortgage REITs Index and is the first exchange-traded product to provide leveraged exposure to a mortgage REIT index offered on a US exchange.

The note offers significant income potential in the form of a variable monthly coupon linked to two times the cash distributions on the index constituents, less any withholding taxes. As of September 30, 2012, this potential equated to a gross yield of 24.82%.

“This ETN is designed for investors who seek a high yield and are bullish on the mortgage REIT sector,” said Paul Somma, Executive Director and Senior ETRACS Structurer. “MORL offers high monthly income potential and leveraged exposure to a mortgage REIT index, all by way of a single, exchange-traded security.”

Mortgage REITs raise capital in the secondary market, primarily through the use of short-term loans, and use that capital to issue mortgages and/or acquire longer-termed, higher-yielding mortgage-related assets, primarily mortgage-backed securities. The mortgage REIT business model relies heavily on the “spread”, or difference, between the mortgage REIT’s short-term borrowing costs and the investment yield earned by it on its longer-termed investments.

In general, wider spreads result in greater operating margins for mortgage REITs. Narrower spreads will generally compress margins and negatively affect mortgage REITs. Because mortgage REITs, like all REITs, must distribute at least 90% of their ordinary taxable income to investors, mortgage REITs have typically produced attractive historical yields.

The Market Vectors Global Mortgage REITS Index tracks the performance of the largest and most liquid mortgage REITs companies globally. The index provides 90% coverage of the investable mortgage REIT universe based on strict size and liquidity requirements. The index offers pure-play exposure, i.e. contains only companies which derive at least 50% of their revenues from the global mortgage REITs marketplace.

Unlike other mortgage REITs-focused indices, the index does not include mortgage finance companies or savings associations. The index currently has 24 components and a full market-capitalisation of $58.25 billion. The top five weightings are Annaly Capital Management (18.92%), American Capital Agency (14.27%), Two Harbors Investment (5.25%), MFA Financial (5.18%), andd Invesco Mortgage Capital (4.77%).

The index is already the underlying to an ETF sponsored by Van Eck Global, the Market Vectors Global Mortgage REITS ETF (MORT), which is listed on the NYSE Arca and has $88 million in assets under management.

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