Mortgage REIT ETFs Fighting the Fed

ETF Trends

Mortgage-backed real estate investment trust exchange traded funds continue to weaken on expectations President Obama’s re-election will offer no opposition to the Federal Reserve’s $40 billion mortgage bond purchasing plan, causing spreads and yields to diminish.

REIT earnings and dividends are under pressure as QE3 has caused spreads, bond yields and homeowner borrowing costs to decline, according to Five Star Equities.

Matt Schilling for Seeking Alpha points out that if the Fed continues to buy mortgage-backed securities and act like a pseudo-mortgage REIT, the sector will face lower yields and profitability. Consequently, with no definitive end to the mortgage purchasing plan, investors are already considering other high-yield options.

The Fed will purchase agency mortgage-backed securities. As such, the greater demand will translate to higher prices. However, the increased prices for MBS will diminish yields. While QE3 would help boost book value, mortgage REITs would suffer from lower interest rate spreads, which diminishes interest income.

“Through the use of leverage, these REITs have yields in the midteens,” Morningstar analyst Patricia Oey wrote in a report. “At this time, mortgage REITs are benefiting from historically low short-term rates, but tightening spreads, or a sudden freeze in the credit markets, would have a significant negative impact on these firms.”

Companies that invest exclusively in agency mortgage-backed securities, like Annaly Capital Management (NLY) and American Capital Agency (ACAS), have taken the brunt of the hit after the Fed’s QE3 announcement. [Options Traders Bet Against REIT ETF]

“A rise in mortgage refinancings and bond prepayments, due to falling rates enabled by Fed policy and large Fed mortgage bond purchases, has left many agency mREITs such as Annaly Capital Management (NLY) and American Capital Agency Corp. (AGNC) trading sharply lower than a month ago,” Barron’s previously reported. [High-Yielding Mortgage REIT ETFs Stumble After QE3]

Annaly recently announced plans to buy CreXus (CXS) in a bid to diversify away from agency-backed paper, reports Matt Koppenheffer for the Motley Fool.

  • iShares FTSE NAREIT Mortgage REITs Index Fund ETF (REM) : 12.08% 30-day SEC yield; NLY is 21.0%, ACAS is 16.2%
  • Market Vectors Mortgage REIT Income ETF (MORT) : 12.48% 30-day SEC yield; NLY is 18.4%, ACAS is 13.9%

iShares FTSE NAREIT Mortgage REITs Index Fund ETF

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For more information on real estate investment trusts, visit our REITs category.

Max Chen contributed to this aritcle.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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