Following a pullback on rising rate fears, high-yield mortgage-related real estate investment trust exchange traded funds could be attractive due to cheaper valuations.
The iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) has declined 4.1% over the past three months while the Market Vectors Mortgage REIT ETF (NYSEArca: MORT) decreased 3.4%. Both funds, though, gained a little over 2% in the past week and crossed over their short-term, 50-day trend lines.
REM has a 15.29% 12-month yield and MORT shows a 11.31% 12-month yield.
Doubleline Capital’s Jeff Gundlach at a recent presentation pointed out that mortgage REITs are trading at significant discounts following the rout in recent months, reports Michael Aneiro for Barron’s.
“The mortgage REITs look cheap now, just like closed-end bond funds look cheap… Prices are trading at about a 10% discount to book value,” Gundlach said. “I think they represent value but I don’t think they’re going to go higher anytime soon…. I think I would focus on the agency REITs, I think they will outperform over a cycle.”
Both REM and MORT have significant exposure to Annaly Capital Management (NYSE: NLY) and American Capital Agency (NasdaqGS: AGNC), which both invest in agency-backed securities.
“The yield there even at a dollar type of dividend is near 9%,” Gundlach added. “You’re going to have a lot of volatility, I don’t think you’re going to see price gains soon. But Annaly is a well-run mortgage REIT.”