One of the key limitation for Australian investor looking for yield is the limited fixed income investment options. It is extremely difficult for retail investors to directly own corporate bonds or invest in real estate mortgage securities.
What are Mortgage ETFs?
Mortgages are a form of asset backed loan and a mortgage ETF is an exchange traded fund which owns a collection of either commercial or residential real estate mortgages.
In most sectors exchange traded funds provides an efficient means of accessing markets otherwise unavailable. Unfortunately in this case the ETF providers like Vanguard, State Street and iShares have yet to roll out an equivalent Australian Mortgage ETF.
We think one of the main impediments for the creation of a mortgage ETF listed on the ASX is due to the lack of mortgage index and in turn the direct result of the major dominance of the Australia banks in the residential and commercial lending market.
The Australian fixed income is extremely concentrated in the hands of the big 4 and the loans issued by the banks are retained on balance sheet rather than distributed to third party investors.
Alternative Mortgage ETF Options
Since there are no mortgage ETF listed on the ASX there are still a few alternative options for investors looking for asset backed fixed income investment funds however the risk profile vary widely and depends on the individual investors circumstances.
Real Estate Direct Lending Funds
There are a number of ASX real estate debt funds which holds mortgages either from the deals the fund sponsor originated or bought on the secondary market.
These funds act similar to a mortgage ETF with a couple of exceptions:
- Due to the active nature of the investment strategy the fees for these funds are typically higher and pretty standard to have multiple layer of fees.
- As the underlying mortgages are mostly direct bilateral loans there is limited visibility to what kind of loans and quality the funds actually hold
- Options are poor as given the high fee nature as the strategies for the listed funds have been focused on the higher end of the risk spectrum to show a decent yield given the fees.
Unlisted Mortgage Funds
Unlisted mortgage funds are a pooled investment fund which invest in mortgages and in Australia these type of funds has a chequered history.
One of the major risk of owning an unlisted mortgage fund is the risk that the responsible entity can freeze redemption in times of market stress.
This is exactly what happened to the unlisted mortgage fund industry during the GFC where the retail investors looking for yield invested in a number of unlisted mortgage funds backed by blue chip companies like CBA and Challenger.