Higher yielding assets are benefiting from the Federal Reserve’s lower for longer policy on interest rates. That group includes the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) and the rival Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT), which hold mortgage real estate investment trusts, or mREITs.
Those ETFs and their higher-yielding gold a reprieve earlier this week when the Fed again opted against raising interest rates. MORT and REM, like other REIT assets become more attractive when yields on other fixed-income assets are pushed down. On the bright side for REM and its investors is the fact that the ETF’s dividend is expected to rise for the first time since 2014.
Recently, S&P Global Market Intelligence equity analyst Erik Oja argued that government agency mortgage backed securities are more appealing if the U.S. economic recovery moderates and global political stability increases, which could keep pressure on long-term U.S. interest rates.
“REM and the mREITs in the REM portfolio are impacted by higher interest rates in various ways. Many of the mREITs employ leverage to boost their yields by borrowing. Additionally, higher interest rates reduce the value of the mortgages the held by the mREITs,” according to a Seeking Alpha analysis of REM.
If the Fed decides to hike rates, mREITs will be pressured. Mortgage REITs rely on short-term loans, so costs could rise if short-term rates suddenly spike.