No Surprises Here: Mortgage REITs Stumble
Although this ETF offers almost unparalleled yield, it comes with significant risk.
Mortgage REITs are a polarizing asset, either loved (for their yield) or despised (for their risk) by investors. The bears must be feeling vindicated now, as the market's emotional response to the Fed's recent announcements sent iShares Mortgage Real Estate Capped (REM) into a nosedive since the beginning of April. REM lost a stomach-churning 19% over the past three months, driven by instability in the yield curve and falling book values. For investors considering an allocation to REM, the sharp decline of mortgage REITs over recent months should serve as a reminder of this asset's high risk profile. Mortgage REITs' double-digit yield, while attractive, is a flashing signal that this subsector is only appropriate for very risk-tolerant investors willing to make a bet on future rates. On the upside, mortgage REIT valuation is fast approaching post-2008 discount levels.
Not to be confused with equity REITs, which generate income by managing properties and collecting rent, mortgage REITs are financial firms that arbitrage the spread between the short-term interest rate and income from mortgage-backed securities. Mortgage REITs do not have access to deposit funding, so they rely on short-term loans like repurchase agreements. The largest firms purchase federally guaranteed securities from Freddie Mac and Fannie Mae.
Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.