What is MVRL? (Pros, Cons, and Strategies)
If you're seeking exposure to high-yield mortgage REIT stocks with leverage, MVRL could be an intriguing option for you. MVRL is an Exchange Traded Note (ETN) designed to offer leveraged monthly income. This product can be especially appealing for income-focused investors, but it also comes with significant risks that should be carefully considered. In this blog, we'll explore what MVRL is, its pros and cons, and some strategies for investing in it.
What is MVRL?
MVRL is part of the ETRACS ETN lineup offered by UBS. The full name is the ETRACS Monthly Pay 1.5x Leveraged Mortgage REIT ETN. Essentially, it's a leveraged ETN that aims to provide 1.5 times the monthly performance of the MVIS US Mortgage REITs Index.
Unlike ETFs, which hold a basket of securities, ETNs are unsecured debt notes issued by financial institutions. MVRL leverages the returns of the MVIS US Mortgage REITs Index, making it a high-yield investment choice but with amplified risks.
Key Features of MVRL
- Leverages performance by 1.5 times the MVIS US Mortgage REITs Index
- Provides monthly income based on the leveraged performance
- U.S. dollar-denominated ETN
- High yield due to the leverage and underlying REITs, which are often high-dividend stocks
The index is composed of U.S.-listed mortgage REITs, which invest in mortgage-backed securities, aiming to offer an even higher yield through leverage.
MVRL Composition
The underlying MVIS US Mortgage REITs Index includes companies like Annaly Capital Management (NLY), AGNC Investment Corp. (AGNC), and Starwood Property Trust (STWD), among others. These REITs take advantage of property loans and mortgage-backed securities to generate income. Due to the nature of mortgage REITs, they often have higher yields compared to other types of REITs.
Pros of MVRL
High Monthly Income
One of the primary advantages of MVRL is its high monthly income, attributable to both the underlying mortgage REITs and the 1.5x leverage. For income-focused investors, this could be a very appealing feature. The leverage magnifies not only the potential gains but also the dividend yield, providing aggressive income.
Diversification in Income Strategy
Investing in MVRL diversifies an income portfolio differently compared to traditional dividend stocks or non-leveraged REITs. The leverage and the focus on mortgage REITs introduce a unique income stream that can complement other conservative income strategies.
Exposure to Mortgage Sector
MVRL gives investors direct exposure to the mortgage sector, which may not be as easily accessible through traditional ETFs. This can be a strategic diversification move, especially when mortgage REITs are in a favorable economic environment.
Cons of MVRL
High Risk Due to Leverage
The leverage mechanism in MVRL amplifies both gains and losses. This makes the ETN considerably riskier than other income-based investments. During periods of volatility or declining markets, the losses can be substantial, leading to large drawdowns in portfolio value.
Credit Risk of the Issuer
As an ETN, MVRL is an unsecured debt obligation of UBS. This introduces credit risk, meaning if UBS faces financial difficulties, it could impact the value of the ETN. Unlike ETFs, ETNs carry this additional layer of risk.
Sensitivity to Interest Rates
Mortgage REITs are highly sensitive to interest rate fluctuations. Rising interest rates can negatively impact the spreads that these REITs rely on for income. Given the leveraged nature of MVRL, such fluctuations could have an outsized negative effect on the ETN.
MVRL Investment Strategies
Due to its leveraged nature and focus on high-yield mortgage REITs, MVRL is best suited for specific investment strategies and investor profiles.
Income-focused Investment Strategy
MVRL is primarily for investors who need enhanced monthly income and are willing to accept a higher level of risk. To make the most out of this ETN, consistent reinvestment of the high monthly distributions could help in compounding the returns over time. This is particularly appealing for retirees or income investors who can afford higher risks for potentially higher rewards.
Hedging Strategy
Given its leverage, MVRL could also be used in a hedging strategy for those who are already invested in sectors highly correlated with interest rates. By adjusting the size and timing of the MVRL investment, investors can potentially offset losses in other parts of their portfolio under certain conditions.
Short-to-Medium Term Strategy
For investors with a higher risk tolerance, MVRL can be part of a short-to-medium term strategy to capitalize on favorable economic conditions in the mortgage and housing markets. However, due to its volatility and leverage, it's crucial to monitor the market regularly and be prepared to exit the position swiftly in adverse conditions.
Conclusion
MVRL offers a unique proposition in the world of high-yield income investments with its leveraged exposure to mortgage REITs. While it promises high monthly income and diversified income streams, the elevated risks due to leverage and issuer creditworthiness must be carefully considered. This ETN is not suitable for all investors but can play a significant role in a diversified, income-focused portfolio for those who understand and can manage the associated risks.