iShares Mortgage Real Estate ETF

REM

Market cap $616M

The yield that looks safe today may be your biggest long-term risk. Dividend cuts can be more damaging than market pullbacks. A better income strategy most retirees overlook.

mREIT holdings of the iShares Mortgage Real Estate Capped ETF benefited from lower funding costs in 2025, with incremental Fed rate cuts likely to provide further relief in 2026. U.S. GDP growth is projected to accelerate to 2.3% in 2026, providing a tailwind for mREITs focused on commercial mortgages. This should allow for REM's 8.65% dividend to return to growth, as indicated by its higher SEC yield.

MORT is rated a buy due to its superior yield, historical performance, and lower expense ratio versus REM, rated a hold. MORT offers a higher, sustainable dividend yield (11.67%) and better diversification across holdings, making it attractive for income-focused investors. Favorable rate cut projections and declining mortgage rates create a strong tailwind for mortgage REITs, supporting both income and capital appreciation potential.

U.S. equity markets notched another series of record highs this week, surging into the weekend after surprisingly dovish commentary from Federal Reserve Chair Powell, who hinted at imminent rate cuts. Powell used his final Jackson Hole speech as Fed Chair to deliver a clear policy pivot, an unexpected reversal after months of insistence that tariff-related inflation warranted a hawkish framework. Markets were equally relieved by the policy-focused nature of Powell's speech amid speculation that the address may be used instead as a potential defiant sermon on central bank independence.

U.S. equity markets fell sharply this week, while benchmark interest rates retreated to three-month lows, after revised employment data showed that job growth was far weaker than initially reported. The BLS payrolls report showed softer-than-expected hiring in July and the steepest two-month downward revisions to jobs growth since 2020, raising concern that the Fed may be "behind the curve." The downward revisions came days after Fed Chair Powell used it as the primary evidence for "solid" labor markets, which justified the FOMC's decision to keep rates in "restrictive" territory.

The iShares Mortgage Real Estate Capped ETF invests exclusively in mREITs, exhibiting a 69.17% allocation to its top ten positions. REM's ten largest positions are projected to deliver capital gains of about 4.5% over the next twelve months. The ETF's ~9.3% current yield remains its main appeal, although weakness in commercial mREITs has delayed an anticipated return to dividend growth.

Not only do high yielding ETFs keep you well diversified, they'll also pay you handsomely just to hold the fund With an expense ratio of 0.48%, the REM ETF has a 30-day yield of just over 10.3%.

REM is one of those ETFs I am always tracking, even if I don't currently own it (I don't). The mortgage REIT industry is often a steady source of above-average dividend yield, enough to not be too concerned about earning much more than the dividend provides. However, REM has a history of performing very poorly in recessions, which gives me pause, since we might be heading into one soon.

Real estate investment spreads are healthier today with higher cap rates and cost of capital, enhancing long-term returns despite similar nominal spreads. Higher cap rates lead to more accretive organic growth, reinvestment, dividends, debt reduction, and buybacks compared to the low-rate environment of early 2022. The current 8% cap rate and 6% cost of capital environment are more favorable for REITs than the previous 6% and 4% scenarios.

The iShares Mortgage Real Estate ETF is heavily skewed towards a few large-cap mortgage REITs, limiting diversification benefits. REM's 0.48% expense ratio is high and unnecessary, as similar exposure can be achieved by holding key constituent REITs directly. Employment outlook is crucial for REM's performance; current economic signals suggest stability, but the expense ratio remains unjustifiable.