The unexpected fall in interest rates this year has helped high-yield real estate investment trust exchange traded funds generate strong gains, and with the Fed maintaining low rates, the sector may still have room to run.
As benchmark Treasury yields dipped to 2.45% from 3.0% at the start of the year, REITs have provided investors with an attractive yield-generating alternative.
For example, the Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) has increased 14.6% year-to-date while the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) gained 14.7%. REM shows a 15.5% 12-month yield and MORT has a 13.18% 12-month yield.
KBW analyst Michael Widner. argues that investors who believe rates will remain subdued in the short-term can stick to mortgage REITs that utilize agency mortgage-backed securities, reports Philip van Doorn for MarketWatch. [Rate-Sensitive REIT ETFs Rebound]
Both MORT and REM include heavy allocations toward Annaly Capital and American Capital Agency, which both invest exclusively in agency-backed mortgages. REM’s top holdings include Annaly Capital Management (NYSE: NLY) 15.0%, American Capital Agency Corp (NYSE: AGNC) 11.4% and Northstar Realty Finance Corp (NYSE: NRF) 8.1%. MORT’s top holdings include NLY 17.8%, AGNC 13.0% and NRF 8.0%.
“The caveat is you have to be comfortable that rates aren’t going up,” Widner said in the article.