Investors have sought out mortgage-backed real estate investment trust exchange traded funds for their highly attractive yields, riding out short-term volatility as interest rates fluctuated. However, some mREITs are starting to cut back on payouts.
The mortgage REITs are reducing their use of borrowed money, increasing interest-rate hedges, shifting to short-term debt and adding cash reserves in preparation to Fed tapering.
Retail investors could start ditching the securities after the reductions, which could cause a domino effect and force institutional investors to exit as well.
"In the past few years there was this quest for yield among retail investors so they got more into newer agency mortgage REITs such as Armour and American Capital," Christopher Donat, an analyst at Sandler O'Neill & Partners LP, said in the article. "If those investors start selling mortgage REITs, institutions might be worried there's more retail selling to come and not take up the slack."
Mortgage REITS have declined this year as investors exited positions ahead of rising interest rates.
"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.
The mREIT ETFs, though, rebounded after the Fed unexpectedly kept its bond purchasing program unchanged.
The iShares Mortgage Real Estate Capped ETF (REM) rose 3.1% over the past month while the Market Vectors Mortgage REIT ETF (MORT) gained 3.5%. Both REM and MORT have significant exposure to NLY and AGNC.
REM has a 15.36% trailing 12-month yield and MORT has a 10.86% trailing 12-month yield.
iShares Mortgage Real Estate Capped ETF
Max Chen contributed to this article.