Mortgage REIT ETFs: New Value Plays

The iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) and the Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) have been bludgeoned this year due to rising Treasury yields caused by fears the Federal Reserve would taper its quantitative easing program.

So severe was the punishment that earlier this week, REM was sporting a trailing 12-month yield north of 15% while MORT’s 12-month yield was flirting with 11%. [mREIT ETFs may not Yield 15% for Long]

Those high yields may not last as some market observers now view mREITs as value plays. “With the group trading around 0.85x book, we see much too much negativity priced into expectations. These are portfolios of liquid assets trading at 15% discounts to mark-to-market value, which we find overly pessimistic given the rebalancing and hedging that’s taken place combined with what we see as a more contained rate outlook,” said Keefe, Bruyette & Woods in a research note posted by Michael Aneiro at Barron’s.

KBW says mREITs should hold up well to the US debt-ceiling issues because agency MBS, while still government guaranteed, doesn’t need government support to pay timely interest and principal, Barron’s reported.

The bank’s favored mREITs include CYS Investments (NYSE: CYS) ad American Capital Agency (NasdaqGM: AGNC). Alone, American Capital is REM’s second largest, representing almost 14% of the $1 billion ETF’s weight. CYS is REM’s No. 13 holding at 2.6%. American Capital accounts for 13.2% of REM’s weight, but CYS is not a member of that ETF’s 26-stock roster.