One of the worst disasters to befall investors in this crisis was something called the MORL dividend.
MORL is—or rather was—the ticker for the ETRACS Monthly Pay 2XLeveraged ETN (MORL). What’s MORL? It’s a double-leveraged bank-issued note designed to track the MVIS Global Mortgage REITs Index, a market-cap-weighted global mortgage-REIT index.
A mouthful, right?
But the jargon and obscure nature of this investment didn’t stop a lot of people from buying in. The reason was simple: MORL yielded as much as 25% back in March.
Think about that for a minute: a 25% dividend. Hold MORL for just four years and you’d get your entire investment back in cash payouts without selling a single share. Invest $100,000 and you’ll get over $2,000 a month, enough to live a comfortable lifestyle in parts of the country. Who wouldn’t want the option to retire on $100K?
That’s a powerful siren song, to be sure. There was just one problem with MORL…
After the coronavirus hit, MORL lost over half of its value in days. But unlike many other assets, which have largely recovered, MORL went the other way, quickly becoming worthless.
Today, MORL no longer exists, having been liquidated by its issuer, Swiss investment bank UBS, which gave investors pennies on the dollar. That $100,000 retirement? It ended up costing investors $100K.
And consider this: that collapse hit individual investors who were aiming to fund a decent retirement for themselves. Big hedge funds and investment banks owned none of MORL when it collapsed.
That makes MORL worth a deeper look because it reveals two things these folks missed—and shows us how to avoid making the same mistakes ourselves.
MORL Dividend Takeaway No. 1: Know What You’re Buying
It’s clear that many people bought MORL purely for the dividend. But a big dividend is meaningless if you don’t know what’s producing your payout. If an investment promises a 25% yield but doesn’t make a 25% profit to cover that dividend, it’s going to lose value. And there are hundreds of assets promising big dividends that fail because they can’t cover their payout.
Investors could have avoided this if they knew what MORL invests in and, more importantly, how it invests.
MORL mainly invested in mREITs, or real estate investment trusts that hold mortgages. An mREIT is a kind of fund where management pools investors’ money and invests it in real estate. Many REITs buy properties, but mREITs buy mortgages from banks instead. So when a borrower pays their home loan back, that cash goes to the mREIT.
Some high-quality mREITs, like AGNC Investment Corp. (AGNC), have been around for years, and even though they’ve lost value in this crisis, they haven’t suffered nearly as much as MORL. But the fact that MORL invested in mREITs wasn’t the problem—it was how it was investing in those assets.
To explain this, let’s first look at the VanEck Vectors Mortgage REIT Income ETF (MORT), a good benchmark for mREITs. MORT fell 70% from before the COVID-19 crisis, due to the panic selloff of mREITs. MORT has recovered a bit, as mREITs slowly get back to normal, while MORL, of course, did no such thing.
Why? Because MORL isn’t an exchange-traded fund (ETF) like MORT. It’s an exchange-traded note (ETN). Because it was an ETN, MORL was essentially an IOU created by its sponsor, Swiss investment bank UBS, to investors.
It basically works like this: you give UBS $100, and UBS says it will give you a cash dividend similar to what you’d get if you bought $100 in mREITs instead. You can then buy back your initial investment at the current market value of those mREITs.
If this sounds like it’s investing in mREITs with extra steps, that’s because it is.
But those extra steps came with benefits for the bank, and for investors. For the bank, there was an opportunity to earn fees (UBS gets a nearly 1% fee for its ETNs, although there isn’t much effort required to maintain them). On the investor side, there was the opportunity to get full leverage, meaning for every dollar you invest, you could also borrow a dollar and invest that, too. The bank also gets interest income from that leverage.
MORL Dividend Takeaway No. 2: Always read the Fine Print
So ETNs are obviously complicated, but that’s not the main problem. This is: one of the covenants of ETNs is that when they fall below a certain value ($5 per share in MORL’s case), the bank can redeem the ETN. That means it can shut down the ETN and give investors cash in lieu of their shares at the current market value.
When UBS did this, investors who had bought into MORL for $15.00 just a single month prior were suddenly given back just 24 cents. And that’s how a 25% dividend—and the too-good-to-be-true promise of a $100K retirement—led to steep losses.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
