Among the highest-yielding assets in the real estate realm or otherwise, it’s not surprising that mortgage real estate investment trusts (mREITs) are enduring punishment as interest rates rise this year.
However, some experts believe the asset class is due for a rebound and that could be good news for the VanEck Mortgage REIT Income ETF (MORT). MORT, which follows the MVIS US Mortgage REITs Index, delivers on the promise of big income as highlighted by a distribution rate of 14.37%.
There’s no denying that’s above-average compensation and investors can use all of that as mREITs tumbled due to the Federal Reserve’s six interest rate hikes. In better news, the tide could be turning in favor of MORT.
“Emerging from this tale of woe is an investment opportunity. High MBS yields are beginning to attract interest from investors in other sectors of the credit markets, such as corporates,” reports Randall Forsyth for Barron’s. “For individual investors with a strong stomach for speculation, beaten-down real estate investment trusts with leveraged mortgage portfolios offer eye-popping yields as high as 20%. There also is a less-risky alternative to mortgage REITs (mREITs), with lower but still-generous yields in the 8%-11% range.”
The $151.6 million MORT is home to 26 mREITs, which is a solid sampling of the publicly traded names in this asset class. Annaly Capital Management (NYSE: NLY) and Starwood Property Trust (NASDAQ: STWD) combine for about 23% of the ETF’s roster.
Retail investors are often seduced by big yields – something MORT clearly offers – but there’s more to the story, including the point that some professional investors are embracing some MORT components. That could signal support for the home gamers that buy this ETF for its stellar income stream.
“Institutions such as hedge funds and other total-return investors are looking increasingly at mortgage-backed securities as their yields have climbed, observes Adam Abbas, co-head of fixed income at Harris Associates. The sector is compelling for those seeking a significantly better yield than Treasuries offer,” according to Barron’s.
In an interview with Barron’s, Harley Bassman, former head of mortgages at Merrill Lynch, identifies several points in favor of mREITs, some of which could cement the case for MORT as a rebound play.
“The supply of new MBS will contract significantly as worsened affordability slows housing activity. Refinancing, which makes the duration of mortgage-backed securities less predictable, will grind to a halt. With most MBS trading at a significant discount to their par, or face, values, their prices should benefit if yields fall. (In contrast, if borrowers refinance, MBS at par and above are prone to be called away, to the detriment of investors.),” noted Barron’s.
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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.
