Mortgage REIT ETFs: New Value Plays

ETF Trends

The iShares Mortgage Real Estate Capped ETF (REM) and the Market Vectors Mortgage REIT Income ETF (MORT) have been bludgeoned this year due to rising Treasury yields caused by fears the Federal Reserve would taper its quantitative easing program.

So severe was the punishment that earlier this week, REM was sporting a trailing 12-month yield north of 15% while MORT’s 12-month yield was flirting with 11%. [mREIT ETFs may not Yield 15% for Long]

Those high yields may not last as some market observers now view mREITs as value plays. “With the group trading around 0.85x book, we see much too much negativity priced into expectations. These are portfolios of liquid assets trading at 15% discounts to mark-to-market value, which we find overly pessimistic given the rebalancing and hedging that’s taken place combined with what we see as a more contained rate outlook,” said Keefe, Bruyette & Woods in a research note posted by Michael Aneiro at Barron’s.

KBW says mREITs should hold up well to the US debt-ceiling issues because agency MBS, while still government guaranteed, doesn’t need government support to pay timely interest and principal, Barron’s reported.

The bank’s favored mREITs include CYS Investments (CYS) ad American Capital Agency (AGNC). Alone, American Capital is REM’s second largest, representing almost 14% of the $1 billion ETF’s weight. CYS is REM’s No. 13 holding at 2.6%. American Capital accounts for 13.2% of REM’s weight, but CYS is not a member of that ETF’s 26-stock roster.

In bid to lure income-starved investors back, mREITs  are reducing their use of borrowed money, boosting interest-rate hedges, shifting to short-term debt and adding cash reserves in preparation of Fed tapering.

The risk for ETFs like MORT and REM and their holdings is that scorned retail investors that previously bolstered the asset will either not return or continue to depart on tapering fears. That could give professional money managers pause before adding to existing positions or initiating new buys in mREIT stocks and ETFs.

iShares Mortgage Real Estate Capped ETF

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REM

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of REM.

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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