Mortgage REITs rely on short-term loans, so costs could rise if short-term rates suddenly spike. However, the negative effect of higher short-term rates could be somewhat offset by quickly rising long-term rates as mREITs benefit from a steeper yield curve and arbitrage the wider spread. Annaly is component in both ETFs.

When Treasury yields surged two years ago, MORT posted a gain of just 1.1% while REM slid 2.7%, underscoring the inverse relationship these ETFs have to Treasury yields. Conventional wisdom dictates that higher interest rates diminish the chances that homeowners will refinance their mortgage rates. Additionally, many mortgage REITs did not anticipate the sharp spike in interest rates and the result was a rash of dividend cuts from REM and MORT holdings.

“On average, the sector will have a 3-4 basis point contraction (with a wide dispersion) in the net interest margin from each 25 basis point rate increase; Ares Commercial Real Estate (ACRE) and STWD are the best positioned for potential increases in rates based on this metric,” said Credit Suisse in the note posted by Barron’s.

Market Vectors Mortgage REIT Income ETF