ETFs that invest in mortgage real estate investment trusts have seen volatility pick up in the wake of the Federal Reserve’s QE3 program that has the central bank pumping more liquidity into the mortgage market.

For example, iShares FTSE NAREIT Mortgage Plus Capped Index Fund (NYSEArca: REM) has bounced the past three days following a two-week slide. The $897 million ETF pays a 30-day SEC yield of 12.3%.

Mortgage REIT ETFs rallied leading up to the Fed’s QE announcement but have weakened in October. [ETF Chart of the Day: Mortgage REITs]

Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) is another option for this asset class. Morningstar analyst Patricia Oey said the ETF is “suitable as a satellite holding for investors who seek higher-yielding securities and who understand the leverage risks associated with mortgage REITs.” [Mortgage REIT ETFs Yielding Over 10%]

The firms seek to benefit from the spread between short-term and long-term rates by using very short-term debt such as repurchase agreements to fund purchases of residential and commercial mortgage-backed securities, she explained.

“Through the use of leverage, these REITs have yields in the midteens. At this time, mortgage REITs are benefiting from historically low short-term rates, but tightening spreads, or a sudden freeze in the credit markets, would have a significant negative impact on these firms,” Oey wrote in an analyst report on MORT.

In September, the Fed said it would purchase more agency mortgage-backed securities at a rate of $40 billion a month.

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