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Ellington Financial's Preferred Shares Outperform MRIT on Risk-Adjusted Returns

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  Published in Stocks and Investing on Sunday, December 14th 2025 at 6:37 GMT by Seeking Alpha

Ellington Financial: A Closer Look at Its Core Mortgage‑Investment Trust and the Superior Risk‑Adjusted Performance of Preferred Shares

Ellington Financial Inc. (NASDAQ: EFIN) has long been a niche player in the U.S. mortgage‑backed securities (MBS) market, providing institutional investors with a blend of risk‑free and higher‑yield products. In a recent Seeking Alpha analysis, the author revisits the company’s two main vehicle classes—its Mortgage‑Backed Investment Trust (MRIT) and its preferred shares—arguing that, while MRIT remains a solid, low‑volatility investment, the preferred shares deliver a markedly better risk‑adjusted return. Below is a distilled view of that argument, with emphasis on the key data points, valuation metrics, and market dynamics that underpin the conclusion.

1. The Business Model in a Nutshell

Ellington Financial is organized into three distinct business lines:

The MRIT vehicle is essentially a “risk‑free” MBS because it holds only fully‑amortized loans with no prepayment option. This feature guarantees a predictable cash flow stream for the trust’s investors, but it also caps the upside potential in a rising‑rate environment. In contrast, the preferred shares are more akin to high‑yield corporate bonds; they offer a floating dividend that tracks the spread above a benchmark, plus a partial equity stake in the company’s earnings and a residual claim on assets after MRIT obligations are satisfied.

2. Recent Financial Performance

The author pulls the latest quarterly data from Ellington’s SEC filings to illustrate the relative performance of the two vehicles.

The preferred shares’ ROE is more than double that of the MRIT, a result of the higher dividend payout and the company’s leverage. The dividend yield difference is also non‑trivial, especially for income‑focused investors. Importantly, the author points out that the preferred shares’ spread over benchmark MBS rates has widened in the last year, indicating that the market is pricing in additional risk relative to the risk‑free MRIT.

3. Valuation Multiples and Market Perception

Ellington’s stock and preferred shares have historically traded at different multiples, reflecting the disparate risk profiles:

• MRIT: Price‑to‑Book (P/B) of ~2.5×, EV/EBITDA of 7.1×
• Preferred Shares: P/B of 3.2×, EV/EBITDA of 9.4×

Using the 2024 earnings data, the author calculates a forward P/E of 12.8× for MRIT and 20.1× for the preferred shares. While the preferred shares look pricier on a headline basis, the higher dividend yield and ROE suggest a more attractive risk‑adjusted return when the dividend‑risk premium is incorporated.

To quantify the risk‑adjusted performance, the author applies the Sharpe ratio to the two vehicles, using a 1‑year risk‑free rate of 4.5 % and the 12‑month total return volatility. The results are:

• MRIT: Sharpe = 0.54
• Preferred Shares: Sharpe = 0.82

The superior Sharpe ratio for the preferred shares indicates that, on a per‑unit‑risk basis, investors earn more excess return from the preferred equity than from the MRIT.

4. Macro‑Economic Context

The analysis rightly notes that the broader macro environment will influence the attractiveness of each vehicle.

• Rising Rates: As the Federal Reserve hikes rates, the spread between the fixed‑rate MRIT coupons and floating‑rate MBS yields could compress. Preferred shares, whose dividend is tied to the spread, stand to benefit if the spread widens further, especially if the company can refinance at lower rates and roll down risk.
• Prepayment Risk: MRIT’s fully amortized structure eliminates prepayment risk, giving it a predictable cash flow profile that is attractive to low‑risk investors. Preferred shares, however, are exposed to refinancing risk because the underlying MBS can be pre‑refinanced when rates fall, potentially lowering future dividend payouts.
• Credit Tightening: The article cites the recent tightening of mortgage underwriting standards. Ellington’s underwriting discipline and conservative loan loss provisions have kept the loan‑to‑value ratios low, keeping default risk at a historically manageable level. This conservative underwriting also limits the upside potential of the preferred shares should defaults rise.

5. Risk Factors and Caveats

The Seeking Alpha piece does not shy away from the risk side of the equation. Key concerns include:

1. Interest‑Rate Sensitivity: Preferred shares are more sensitive to changes in rates because the floating dividend is indexed to a floating spread. A sudden spike in rates could reduce the spread if borrowers refinance, hurting dividend income.
2. Liquidity Constraints: While MRIT is listed on a major exchange and trades in relatively high volumes, the preferred shares have lower liquidity, which may lead to wider bid‑ask spreads and higher transaction costs for traders.
3. Regulatory Risk: The mortgage‑backed securities market has historically been susceptible to regulatory changes, particularly around loan‑originating practices and securitization structures. Any tightening could negatively impact the quality of the underlying pool.
4. Credit Risk Concentration: Although Ellington’s loan portfolio is diversified across regions and borrower types, a concentrated exposure to certain mortgage servicers or regions could amplify loss events during a downturn.

The author recommends that investors who are comfortable with a higher risk premium, who are looking for a higher yield, and who understand the impact of rate dynamics, consider the preferred shares. Conversely, risk‑averse investors who want a predictable income stream should stick to the MRIT.

6. Bottom Line: A Comparative Snapshot

The overall argument is that Ellington Financial’s MRIT continues to deliver solid, low‑volatility returns suitable for conservative investors, but the preferred shares outperform on a risk‑adjusted basis, especially when taking the Sharpe ratio and ROE into account. The preferred shares’ floating dividend structure, higher yield, and superior risk‑adjusted returns make them a compelling option for investors willing to accept slightly higher risk and lower liquidity in exchange for better upside potential.

7. Final Thoughts

Ellington’s dual‑vehicle strategy provides a classic “risk ladder” within a single issuer. By comparing the MRIT to the preferred shares, the article demonstrates how a nuanced look at risk‑adjusted performance can reveal hidden value. The key takeaway for investors is that an informed allocation should align the investment with their risk tolerance, liquidity needs, and the prevailing interest‑rate environment. For those willing to accept a higher risk premium in pursuit of a better Sharpe ratio, the preferred shares appear to be the superior choice—provided they remain comfortable with the underlying mortgage‑backed securities exposure and the liquidity constraints that come with it.