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ETF Specialist

Feeling Gravity's Pull

Amid significant underperformance in 2015 and likely more interest-rate hikes, can risky mortgage REITs turn things around? Here's a look at the largest mortgage REIT exchange-traded fund.

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 IShares Mortgage Real Estate Capped ETF (REM) holds a portfolio of mortgage REITs; mortgage REITs' drivers have little in common with what drives equity REITs. Mortgage REITs offer high yields but can be quite risky. Unlike equity REITs, mortgage REITs hold no real estate and instead are financial firms engaging in arbitrage on the spread between short-term interest rates and income from mortgage-backed securities. Without access to deposit funding, mortgage REITs rely on short-term loans like repurchase agreements.

REM's 18% share-price decline in 2013--compared with that year's strong bull market for domestic stocks--demonstrates mortgage REITs' high risk profile. While attractive, their double-digit yields signal that this subsector is appropriate only for very risk-tolerant investors.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.