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Why Investors Should Consider Mortgage REITs Instead Of Long-Dated Treasuries

ETF Professor

With the Federal Reserve having lowered interest rates three times this year, it's easy to understand investors' affinity for longer duration Treasuries and the related exchange traded funds.

ETFs with exposure to long-dated U.S. government debt are rewarding investors this year. For example, the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT), which has an effective duration of 18.10 years, is higher by almost 17% this year. In turn, investors have lavished $7.85 billion in new asset upon TLT, a total surpassed by just eight other ETFs this year.

Indeed, these are go-go days for bond ETFs, but investors may want to consider a Treasuries alternative in the form of mortgage real estate investment trusts or mREITs.

Why It's Important

That asset class is accessible via ETFs, including the iShares Mortgage Real Estate ETF (CBOE: REM). The $1.38 billion REM is outpacing TLT this year about 100 basis points while offering up a significantly higher yield at 8.10% on a 30-day SEC basis, according to issuer data.

Some professional investors believe REM can extend its outperformance of long-dated government bonds in 2020.

“We believe the upside opportunity in this product remains significant should the yield curve steepen for a sustained period,” Rareview Macro founder Neil Azous said in a note out Monday.

Azous recommended a long position in REM in February. The fund has posted a double-digit gain since that call.

What's Next

“While waiting, long REM is a positive carry alternative to 2-10’s or 5-30’s Steepeners, which have a negative carry. For example, the 12-month yield is 8.42%,” Azous said.

REM allocates over 29% of its combined weight to Annaly Capital Management (NASDAQ: NLY) and AGNC Investment REIT (NASDAQ: AGNC).

Azous is bullish on REM heading into 2020.

“In addition, the ETF’s holdings of credit-oriented mortgage REITs have benefited it this year as high yield credit has returned a ~12% gain alongside broad equity appreciation,” the Rareview Macro founder said. “We will likely carry this position into the New Year.”

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