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 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.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
