Events were starting to shape up quite nicely for the embattled
mortgage REIT market, thanks to a very dovish Federal Reserve. This
accommodative Fed looked to help keep the spread wide between short
and long term rates, a situation which is welcomed news for
That is because these types of companies borrow short term debt and
then take this capital and buy longer-term mortgage securities.
These firms generally use leverage as well, so a wide (and stable)
spread between the short and long term is crucial for their success
No Taper? No Problem for These Dividend ETFs
Yet despite some confidence on the rate front, the actual trading
in the mortgage REIT space hasn't been too great lately, largely
thanks to earnings. In particular,
American Capital Agency Corp (
saw extreme weakness following its latest earnings report.
AGNC in Focus
The company missed the Zacks Consensus Estimate of 84 cents a
share, earning just 61 cents a share instead. This compares
unfavorably both with the previous quarter and the year ago
quarter, while the firm also reported a hefty dividend cut of just
80 cents per share, a cut of nearly 24%.
"We continued to see substantial volatility in both interest rates
and mortgage spreads,"
said President and CIO Gary Kain
in a statement. "We remained disciplined in our approach to risk
management and prioritized book value preservation over short-term
AGNC's miss unfortunately continues the recent trend for the
company at earnings season, as it has seen four misses in a row
now. They have all been pretty big misses too, as all of the last
four were by double digit percentages (see
Bet Against Real Estate with These Short REIT
Thanks to this trend, the stock was down significantly on the day
following the report, with the stock slumping by almost double
digits before trending towards an 8.3% loss. The stock also saw
huge volume, with more than four times as many shares moving hands
for the session than in a normal day.
Industry and ETF impact
The news also trickled down into a number of other players in the
space, as these also sold off heavily in tandem. In particular,
Annaly Capital Management (
- down 3.5%,
Invesco Mortgage Capital (
- down 8.2%,
Hatteras Financial (
- down 2.9%, and
ARMOUR Residential REIT (
- down 6.6%, were hit extremely hard, and most are now within
striking distance of their 52 week lows.
As you might imagine given this widespread bearishness, mortgage
REIT ETFs also plunged on the day. Currently, there are two such
products tracking the space, and we have highlighted both in
greater detail below:
iShares Mortgage Real Estate Capped ETF (
REM tracks the FTSE NAREIT All Mortgage Capped Index, measuring the
performance of the residential and commercial mREIT market in the
U.S. The portfolio consists of 34 securities in its basket, while
it charges investors 48 basis points a year in fees (see
the Top Ranked ETFs here
Top holdings in this ETF include Annaly Capital (17.2%), and then
the in-focus American Capital Agency Corp (14.2%). Beyond that, a
smattering of other firms account for between 3%-7% of the
portfolio, giving the fund a focus on its top ten as over
two-thirds of the assets go to these firms.
The ETF plunged by 3.5% on the session, on volume that was nearly
three times normal, while it is down about 11% YTD. However, the
product does pay a tremendous yield of nearly 13.3%, so it is
definitely an income destination for those willing to tolerate big
Market Vectors REIT Income ETF (
Another option is the less popular MORT form Van Eck. This fund
follows the Market Vectors Global mREIT Index, a benchmark that
looks to track the overall performance of publically traded
mortgage REITs. The basket includes 26 securities in total, while
the net expense ratio comes in at just 41 basis points a year.
This product also has heavy weights in its top ten securities, and
NLY/AGNC as well. However, NLY makes up 15.9% while AGNC accounts
for 12.7% in this fund. The result is then a small cap focus,
though large caps account for about 15% of the fund.
MORT also tumbled by 3.4% on the session, though it has performed a
bit better from a YTD look, losing just 6%. However, the yield on
this product is 10.5% in 30 Day SEC terms, so it does get beaten by
REM on this front.
The short term looks very rocky for the mortgage REIT market,
especially after the AGNC issues. And given how others in the space
have reacted, this might be a widespread issue that could afflict
the entire sector (see
all the Real Estate ETFs here
This may be especially true if the Fed introduces some uncertainty
on the rate front, or if short term rates creep up on their own.
Thanks to these factors, mortgage REITs might be avoids in the near
term, though with a huge yield they still could be interesting
choices for medium term focused investors who have a high tolerance
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Author is long MORT
AMER CAP AGENCY (AGNC): Free Stock Analysis
INVESCO MORTGAG (IVR): Free Stock Analysis
MKT VEC-MTGE RE (MORT): ETF Research Reports
ANNALY CAP MGMT (NLY): Free Stock Analysis
ISHARS-MTG RE (REM): ETF Research Reports
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