Rising interest rates – the scenario market participants have dealt with dating back to early 2022 – have long weighted on high-yield asset classes. That’s been true of the effects of Federal Reserve tightening on mortgage real estate investment trusts (mREITs). To its credit, the VanEck Mortgage REIT Income ETF (MORT ), the original exchange traded fund focusing on mREITs, is sporting a modest year-to-date gain, and that comes with the benefit of a jaw-dropping dividend yield of 13.35%.
While it’s possible that the Fed could raise rates one or two more times before the end of the year, pushing off rate cuts until mid-to-late 2024, mREITs and MORT aren’t lost causes. The combination of rising rates and concerns about the health of the real estate market converged to push valuations down on some MORT holdings, indicating investors don’t have to pay up to access the ETF’s rich yield. That’s something to consider because high-yield assets often aren’t cheap.
Stars Could Align for MORT
Recent economic data could prove supportive of mREITs and MORT.
“Inflation is at its lowest level in more than two years. The labor market has settled into a Goldilocks zone — that is, one that is not too hot or cold, but just right — of slowing but still has solid job gains, with the unemployment rate at historic lows,” wrote Andrew Graham, founder and managing partner of Jackson Square Capital in an op-ed for CNBC. “Meanwhile, second-quarter gross domestic product figures blew past estimates and consumer sentiment last month notched its highest reading since October 2021.”
So should the Fed successfully do the much-desired economic soft landing, that coupled with declining inflation could open the door to rate reductions next year, potentially bolstering the case for mortgage REITs.
“Together, that sequence of events would initiate about an 18-month cycle where the book values of mortgage REIT companies spike, juicing their stock prices,” adds Graham. “What’s more, by getting in during the embryonic stages of this trade, investors can secure an opportunity to collect outsize income payments, just as other yield-producing investments may face challenges due to the prospect of declining rates.”
Graham highlights Annaly Capital Management Inc. (NLY) and AGNC Investment Corp. (AGNC) as among the mREIT names to consider. Those are MORT’s largest and third-largest holdings, respectively, combining for more than 20% of the ETF’s roster. Both names trade at discounts to book value and sport double-digit dividend yields.
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