Rising interest rates adversely impact a number of asset classes that, in more sanguine market environments, are prized by income investors for steady payouts and robust dividend yields. Count mortgage REIT ETFs among that group.
As yields on 10-year U.S. Treasuries have soared 15.5% in the past month, rising to a flirtation with the ominous 3% level, “mREIT” ETFs have stumbled in dramatic fashion. The iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) has stumbled 10.6% since July 19 while its smaller rival, the Market Vectors Mortgage REIT ETF (NYSEArca: MORT) is off 11% over the same time. Monday’s 4.3% drop for REM, which occurred on volume that was well-above average, took the ETF to a closing print of $11.25, a new 52-week low. [Rising Rates Burn REIT ETFs]
MORT has not fallen to a 52-week low yet, but if it closes below $21, it will be the first time the fund has done so since October 2011. Analysts see REITs of all stripes as vulnerable to rising rates because higher borrowing costs could force REITs to allocate more cash to debt servicing rather than dividends. In June alone, Annaly Capital Management (NYSE: NLY) and American Capital Agency (NasdaqGM: AGNC) lowered their dividends. Those are REM’s two largest holdings, combing for 31.7% of the ETF’s weight. [mREIT ETFs Slammed by Rising Interest Rates]
Since the end of the financial crisis, mREIT stocks and ETFs have been solid performers, getting a lift from the Federal Reserve’s ultra-loose monetary policy. Near-zero interest rates made financing cheap, allowing REM and MORT holdings to use leverage to bolster their yields.
The Fed has been buying $40 billion in mortgage-backed securities per month, which had been a boon for MORT and REM. That is until tapering chatter started in earnest in May. MBS are vulnerable to rising short-term rates because those higher rates are seen as dampening refinancing activity. Since May 20, REM has plunged nearly 26%, putting the ETF squarely in a bear market. MORT is down 23.7% over the same time. [mREIT ETFs Hit by Tapering Chatter]
MORT allocates 28.2% of its weight to Annaly and American Capital. Shares of Annlay have tumbled more than 29% in the past 90 days and touched a new 52-week low Monday. American Capital is lower by 31% over the same time. On Monday, the stock closed less than 25 cents above its 52-week low.
iShares Mortgage Real Estate Capped ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of REM.