Exceptional Returns With Low Volatility: Why I Exited Ellington Financial Series B Preferred Share

Core Insights - The mortgage REIT sector is often misunderstood and mispriced, influenced by interest rates, spreads, and portfolio structure, creating investment opportunities for those with a strong understanding of the sector [1] - Preferred shares in the mortgage REIT sector provide high yields with lower risk and volatility compared to common shares, making them an attractive investment option [2] Company Overview - Ellington Financial (EFC) has a diverse portfolio that includes both agency and non-agency mortgage assets, and it is actively monitored for investment opportunities [3] Investment Strategy - The company has consistently invested in EFC's preferred shares, which have provided excellent trading opportunities due to high yield, price appreciation, and low volatility [6] - A recent position in EFC-B was closed to capitalize on strong returns, as the risk/reward balance became less attractive compared to other opportunities [7] Dividend and Valuation Insights - EFC-B is set for a moderate increase in targets as the dividend reset date approaches on January 30, 2027, transitioning from a fixed-rate to a new rate based on the five-year Treasury rate plus a credit spread of 4.99% [9] - The annualized yield to call for EFC-B was around 10.1% at the time of sale, indicating potential for respectable returns, although the valuation is always relative [11] Market Monitoring - The company will continue to monitor EFC-B closely, as price dips could create attractive entry opportunities, and preferred shares often move through cycles [13] - Current valuation shows EFC-B carrying a 10.6% yield to call, with the possibility of being called, but the decision to harvest gains was made based on relative attractiveness compared to other options [15] Performance Results - EFC-B has been among the best-performing preferred shares in the sector, with strong returns achieved through disciplined investment strategies [14][21] - The investment results demonstrate the importance of valuation discipline, as preferred shares can deliver excellent returns when purchased at attractive valuations [26]