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Mortgage REIT ETFs Hit as Interest Rates Surge


Interest rates jumped on the back of a robust jobs report and renewed concern over Fed “tapering,” pressuring rate sensitive mortgage real estate investment trust exchange traded funds.

The iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM) fell over 5% during trading Friday and the Market Vectors Mortgage REIT Income ETF (MORT) dropped more than 4%.

The Bloomberg Index of REITs shares declined as much as 6%, the largest intraday drop since October 2011 on speculation that the Federal Reserve will begin reducing its asset purchasing plan after the better-than-expected employment numbers for last month, Bloomberg reports. [Rate-Sensitive Equity ETFs Smacked on Jobs Report, Rising Yields]

Meanwhile, the benchmark 10-year Treasury bond yield rose a little over 20 basis points to 2.7%. [Treasury ETF Lowest Since Aug 2011 on Fed Taper Talk]

Mortgage REITs, or mREITs, have capitalized on a low interest rate environment, but rising rates will have a significant negative impact on the sector. When the Fed eventually raises interest rates, mREIT yields could fall due to higher funding costs.

“If mortgage rates increase and the Fed keeps short-term interest rates low, these REITs will post strong performance,” according to Morningstar analyst Abby Woodham. “With financing so cheap, mortgage REITs have used leverage to provide an attractive yield. However, because these firms are so extensively leveraged, they are very susceptible to interest-rate fluctuations.”

iShares FTSE NAREIT Mortgage Plus Capped Index Fund

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

Max Chen contributed to this article.

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.