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.
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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.
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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.
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.
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.
“The year-to-date total return on REM of 18.7% is what could have been expected given that there have been no rate increases by the Federal Reserve in 2016. In January 2016, even those most bearish on REM and the mREITs would have conceded that if there were no rate increases by the Federal Reserve this far into 2016, then REM would have had a high total return at this point in time,” adds Seeking Alpha.
For more information on real estate investment trusts, visit our REITs category.
iShares Mortgage Real Estate Capped ETF
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