MORL - ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN

[Gregmal]

This is not a screaming buy or intended to be a "timely" trade. More so interesting is the idea/ability to leverage this. 19.5% yield. Say you are able to margin this at 50% you can realistically expect to see the entire return of your principle in about 3 years. My understanding is that this carries some of the negative effects of levered ETF's but not the same type of decay as the worst offenders. The underlying mREITS are in decent shape. So all things remaining equal you're capturing 35-39% on your money here if you can margin this. Anyone familiar with this? Any thoughts?

[DTEJD1997]

This is not a screaming buy or intended to be a "timely" trade. More so interesting is the idea/ability to leverage this. 19.5% yield. Say you are able to margin this at 50% you can realistically expect to see the entire return of your principle in about 3 years. My understanding is that this carries some of the negative effects of levered ETF's but not the same type of decay as the worst offenders. The underlying mREITS are in decent shape. So all things remaining equal you're capturing 35-39% on your money here if you can margin this. Anyone familiar with this? Any thoughts?

An interesting idea/position for sure...but are you sure that this security is able to be margined?

 

Another thought is that the amount of leverage would simply be incredible, assuming you bought $100k of stock and had $50k of equity.

 

You have the following layers of margin:

 

Your personal margin account  x2

 

The ETF is x2

 

The individual mREIT companies are usually HEAVILY leveraged....just off the top of my head, I would guess that they are leverage 4x....but they might even be levered 10x, perhaps even slightly more?

 

so you would have somewhere between 16x to 40x leverage in total?

 

Assuming no defaults, blowups, credit seizures, or interest rate moving too far one way or the other...sure, you are going to make a lot of money.

 

Just seems like a lot of risk (leverage), especially when we are likely looking at climbing interest rates for the foreseeable future.

[Gregmal]

This is not a screaming buy or intended to be a "timely" trade. More so interesting is the idea/ability to leverage this. 19.5% yield. Say you are able to margin this at 50% you can realistically expect to see the entire return of your principle in about 3 years. My understanding is that this carries some of the negative effects of levered ETF's but not the same type of decay as the worst offenders. The underlying mREITS are in decent shape. So all things remaining equal you're capturing 35-39% on your money here if you can margin this. Anyone familiar with this? Any thoughts?

An interesting idea/position for sure...but are you sure that this security is able to be margined?

 

Another thought is that the amount of leverage would simply be incredible, assuming you bought $100k of stock and had $50k of equity.

 

You have the following layers of margin:

 

Your personal margin account  x2

 

The ETF is x2

 

The individual mREIT companies are usually HEAVILY leveraged....just off the top of my head, I would guess that they are leverage 4x....but they might even be levered 10x, perhaps even slightly more?

 

so you would have somewhere between 16x to 40x leverage in total?

 

Assuming no defaults, blowups, credit seizures, or interest rate moving too far one way or the other...sure, you are going to make a lot of money.

 

Just seems like a lot of risk (leverage), especially when we are likely looking at climbing interest rates for the foreseeable future.

 

No question about it. I have a small amount of my portfolio that I reserve for more screwball type investments. Some heavily complex, some almost stupidly simple. This one is just a leverage bonanza.

 

In regards to the distributions, they have declined from $5.xx ish to now low $3.xx a share although show stabilization/growth for the first time this year. It intrigued me though how quickly you can bury yourself under the cash coming back to you. Maybe wait until distributions return your principle and then just DRIP the rest and see where it goes.

 

Leveraging it, I know IB is default, which I'd imagine is 50%. I know a few other firms that are fine with 50% as well, although I will note that over the past 12-18 months several clearing firms have gotten very tight with margin requirements on levered ETF's.

[BG2008]

This may come back to haunt me for saying it....Sometimes, stupid leverage itself is a form of value investing

 

This is not an endorsement of the MORL.  It's just inverting the value investing logic and go extreme in the opposite direction.  If an one year ATM Call/Put on the SPY 500 cost 1%, I will take that bet any day.