Mortgage real estate investment trusts (mREITs) are perking up, with yields in the asset class still impressing. Income-starved investors may want to examine the VanEck Vectors Mortgage REIT Income ETF (NYSEArca: MORT).
Mortgage REITs have exhibited a negative correlation to interest rates changes, and will continue to do so if the yield curve flattens. Many agencies use leverage to capitalize on the arbitrage spread between short- and long-term interest rates, so companies can still make money in a rising rate environment as long as long-term rates rise faster than the short-term rate.
MORT tracks the MVIS US Mortgage REITs Index. Mortgage REITs may stand to benefit from the evolving mortgage finance market.
“We find this sector is particularly attractive because it can be so inefficient. Long term, share prices revolve around book value. In the short term, the price-to-book ratios can deviate materially. Simply by understanding that, you can put yourself in a better position,” according to Seeking Alpha.
Big Opportunity, Big Yield
MORT is higher by almost 20% over the past month, but it still yields a stout 12.15%.
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.
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. The result was a rash of dividend cuts from MORT holdings.
Fortunately, interest rates are at historic lows, indicating MORT’s yield is tenable for now.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.