AXS Investments has unveiled a new income-focused ETF providing diversified exposure to residential and commercial mortgage real estate investment trusts (mREITs).
Greg Bassuk, CEO of AXS Investments.
The AXS Real Estate Income ETF (RINC US) has been listed on NYSE Arca with an expense ratio of 0.89%.
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 ETF will make distributions to investors on a monthly basis.
RINC expands AXS Investments’ suite of alternative income offerings that also includes funds providing exposure to CLOs, tactical income solutions, and sustainable income.
Commenting on the new listing, Greg Bassuk, CEO of AXS Investments, said: “We’re very excited to bring RINC to market as a unique offering within our range of alternative income-focused solutions. As investors seek higher yields, many have become overly reliant on corporate junk bonds which can bring risks with regard to their quality, duration, and ties to the corporate credit cycle.
“With RINC, investors and advisors now have the ability to diversify the high-yield sleeve of their portfolios and complement a broader real estate or alternatives portfolio with unique exposure to the credit side of real estate and an alternative to high yield corporates.”
Methodology
The fund is linked to the Gapstow Real Estate Income Index which was developed by Gapstow Capital Partners, a NYC-based management consulting firm specializing in alternative credit investments. Gapstow manages over 30 credit-based indices.
The index consists of US-listed mREITs with market capitalizations above $500 million and average daily trading volumes greater than $750,000.
The index controls sector weights by allocating 50% to mREITs focused on commercial real estate lending, 25% to mREITs focused on non-agency residential real estate debt, and 25% to mREITs focused on agency residential real estate debt. Within each sector, eligible mREITs are equally weighted.
The index is reconstituted semi-annually and is rebalanced on a quarterly basis to promote its diversified exposure.
Chris Acito, CEO of Gapstow Capital Partners, said: “mREITs, in general, are currently trading at compelling valuations and wide spreads by historical standards as the category has had to digest a rapid rise in interest rates, high office vacancies, and a short flurry of banking crises, all in short order. But rates eventually normalize, demand for residential housing remains high, and a clear retrenchment of banks from real estate lending should provide significant opportunity to a range of mREITs to both take on and originate compelling new debt investments.
“An equal-weighted, well-diversified approach to accessing the space will be key as the category enters its next phase, and the index we created to underpin RINC is one we expect to effectively capture these changing market dynamics.”