Mortgage REIT ETFs: 10% Yields + Low Volatility

by on October 9, 2012 | ETFs Mentioned:

The hunt for meaningful yield amid a landscape dominated by low-rate central bank policy has proven to be a challenge even for the most seasoned value investors. Luckily, the exchange-traded universe is vast and when it comes to dividend ETFs, investors can beef up their portfolio’s current income through a variety of options. One particular breed of products that is evading the radar of many warrants a closer look as it stands to offer a very attractive source of yield without handfuls of volatility [see Monthly Dividend ETFdb Portfolio].

Mortgage REITs In Focus

Mortgage REIT ETFs have turned in a stellar performance year-to-date as these funds have managed to outperform their broad-based Real Estate ETF counterparts in terms of volatility and dividend yield as well. This segment of the real estate market has been able to thrive as low interest rates have kept on a lid on the perceived risks that are otherwise associated with these securities [see How To Pick The Right ETF Every Time].

By nature, REITs have always held a spot in income-investors’ hearts; these securities must pay out 90% of their income to shareholders in order to avoid taxation at the corporate level. As such, this breed of dividend-paying stocks has a history of generating high-yields although, as the recent financial crisis demonstrated, this corner of the market is also laced with risks. Nonetheless, the current economic environment is ripe with opportunities in the real estate sector as borrowing costs are expected to remain low through 2015. Furthermore, the Fed’s announcement of QE3 has spurred even greater interest in the mortgage REIT industry; the new stimulus program will look to purchase roughly $40 billion in mortgage-backed securities each month, injecting both resources and confidence to fuel the sluggish recovery [see also 3 (Unexpected) High-Yielding ETF Opportunities].

When considering the table below, it’s quite clear that Mortgage REITs offer a superior risk/return profile relative to the broad domestic REIT market as represented by the biggest fund in the space, the Vanguard REIT ETF (VNQ) [data as of 10/4/2012]:

Ticker ETF YTD Return 200-Day Volatility 30-Day SEC Yield
REM iShares FTSE NAREIT Mortgage REITs Index Fund 30.28% 9.93% 12.34%
MORT Van Eck Market Vectors Mortgage REIT Income ETF 29.68% 9.95% 11.15%
VNQ Vanguard REIT ETF 14.96% 14.99% 3.30%

REM Vs. MORT

The bigger of the two Mortgage REIT funds, REM, has accumulated just over $930 million in assets under management since launching in mid-2007. This iShares offering charges 0.48% in annual expenses, features a quarterly dividend distribution, and looks to track the performance of the residential and commercial real estate, mortgage finance and savings associations sectors of the U.S. stock market. This ETF holds 30 securities in total and the top ten account for over two-thirds of total assets; Annaly Capital Management and American Capital Agency Corp. make up over one-third of the entire portfolio [try our Free Head-To-Head ETF Comparison Tool].

MORT trails in assets having launched in late 2011, however, this ETF takes home the cake when it comes to costs; the Van ECK mortgage REIT ETF charges only 0.40% in annual expenses. This fund includes companies and trusts that are primarily engaged in the purchase or service of commercial or residential mortgage loans or mortgage‐related securities. MORT is comprised of 25 securities in total, and the top two individual holdings are identical to those of REM and also account for a significant portion of total assets.

Follow me on Twitter @SBojinov

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.