Mortgage ETF Paying 15% Yield After Price Pullback

 |  Includes: MORT, REM
by: Tom Lydon

Following a pullback on rising rate fears, high-yield mortgage-related real estate investment trust exchange traded funds could be attractive due to cheaper valuations.

The iShares Mortgage Real Estate Capped ETF (NYSEARCA:REM) has declined 4.1% over the past three months while the Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) decreased 3.4%. Both funds, though, gained a little over 2% in the past week and crossed over their short term, 50-day trend lines.

REM has a 15.29% 12-month yield and MORT shows an 11.31% 12-month yield.

Doubleline Capital's Jeff Gundlach at a recent presentation pointed out that mortgage REITs are trading at significant discounts following the rout in recent months, reports Michael Aneiro for Barron's.

"The mortgage REITs look cheap now, just like closed-end bond funds look cheap… Prices are trading at about a 10% discount to book value," Gundlach said. "I think they represent value but I don't think they're going to go higher anytime soon…. I think I would focus on the agency REITs, I think they will outperform over a cycle."

Both REM and MORT have significant exposure to Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC), which both invest in agency-backed securities.

"The yield there even at a dollar type of dividend is near 9%," Gundlach added. "You're going to have a lot of volatility, I don't think you're going to see price gains soon. But Annaly is a well-run mortgage REIT."

The mREIT market has been faltering as interest rates inched higher.

"Mortgage REITs are very susceptible to rising rate risk. Mortgage REITs cut their distributions and performed poorly during past rising rate environments," according to Morningstar analyst Abby Woodham.

iShares Mortgage Real Estate Capped ETF

Click to enlarge

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.