As high-yielding real-estate-related assets, mortgage REITs are correlated to interest rates. That explains why the VanEck Mortgage REIT Income ETF (MORT ) has struggled this year.
However, the exchange traded fund, which yields 14.10%, is down, but not out. Speculation regarding a softer view on interest rates by the Federal Reserve could power a MORT rebound. That scenario may already be afoot as highlighted by a 7.82% gain over the past week by the ETF.
Of course, no one has a crystal ball, and forecasting the Fed’s next moves is a notoriously difficult task. Ahead of the next meeting of the Federal Open Market Committee, a case can be made that the central bank will cut, raise, or leave rates unchanged. For now, it appears leaving rates unchanged will be the Fed’s near-term path. But that could give way to rate cuts, potentially boosting the allure of MORT in the process.
Pros Backing Mortgage REITs
Some professional market participants are turning bullish on mortgage real estate investment trusts (mREITs), including MORT member firms. That includes Rareview Capital founder Neil Azous.
In a recent note to clients, Azous discussed mREITs, using Annaly Capital Management (NLY) as the proxy. Annaly Capital is MORT’s largest holding, at a weight of 11.64% as of Nov. 6, according to VanEck data.
“NLY fell seven weeks in a row, totaling -32.25%,” observed Azous. “The last week of its drawdown was the most violent (-9.30%) with almost two times the average weekly volume. Last week, NLY rebounded 16.63% on nearly two times the average weekly volume.”
That’s relevant to MORT investors because Annaly is the ETF’s largest holding. It’s also relevant also because it’s viewed as a proxy for other mREITs. Azous noted that Annaly’s bullish reversal last week, which was confirmed by strong volume, could prove meaningful to warrant long exposure to mREITs.
He added that he’s focused on mREITs such as Annaly and Agnc Investment (AGNC), which hold mortgage-backed securities backed by U.S. government agencies. MORT, which tracks the MVIS US Mortgage REITs Index, allocates 7.57% of its weight to Agnc Investment, making that stock the ETF’s third-largest holding.
Although the weighted average market value of MORT holdings is just $2.9 billion, the ETF allocates 80% of its weight to mid- and large-cap mREITs. That could be a valuable trait as Azous said he’s avoiding small-cap names in the asset class for the time being.
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