Published September 14, 2012
The Federal Reserve said Thursday it will go on a mortgage-backed securities shopping spree to the tune of $40 billion worth of bonds per month. Elevating its purchases of mortgage-backed securities shows the central bank is concerned about economic growth and is willing to take aggressive action to jolt the housing and labor markets.
If the gambit does not bear near-term fruit, the Fed said it "will continue its purchases of agency mortgage-backed securities" and purchase other assets while evaluating additional policy tools for possible use. Cutting through all the Fed speak, it is clear the central bank's mortgage-buying efforts could benefit the following ETFs:
PIMCO Total Return ETF (BOND) Colloquially referred to as the "Bill Gross ETF," a case can be made that perhaps no bond ETF will benefit more from Thursday's Fed news than BOND. The reason is simple: Forty-five percent of BOND's portfolio at the end of August was in mortgage-backed securities, according to ETF Trends.
Gross acknowledged BOND is "well positioned" to take advantage of the Fed mortgage-buying program. Not that BOND needs the help. By assets, the $2.6 billion BOND is the most successful new ETF to debut this year. BOND also wears the crown of largest actively managed ETF.
iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM) There is another reason why REM stands to benefit from the Fed's aggressive efforts to stimulate the economy and it relates to how the ETF's constituents make profits.
As has been noted, REM's holdings profit on the spread between short-term and medium-term interest rates. With the Fed pledging to hold rates down through mid-2015 instead of late 2014, that buys mortgage REITs some extra time with which to deliver higher profits and robust dividends to income investors. REM is up 0.7 percent today on double the average daily turnover.
Also consider the Market Vectors Mortgage REIT Income ETF (MORT).
IndexU.S. Real Estate Small Cap ETF (ROOF) One could choose to ignore the Fed's efforts to bolster the U.S. housing market to focus on the strength in small caps as a reason to look at the IndexU.S. Real Estate Small Cap ETF. ROOF devotes 30.6 percent of its weight to mortgage REITs, so there is some duplication in terms of holdings with REM and MORT.
Residential REITs account for just 4.5 percent of ROOF's weight, but the ETF's index sported a 6.5 percent yield at the end of the second quarter. ROOF's response to the mortgage-buying news highlights the ETF's utility as a way to profit from this theme going forward. The fun is up 2.1 percent today on volume that is more than triple the daily average.
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