Mortgage real estate investment trusts (REITs)—high-yielding equities that are made up of mortgage-backed securities—have climbed more than 10% year-to-date, as measured by the value of the iShares Mortgage Real Estate Capped exchange-traded fund (REM), in spite of concerns that these REITs would encounter serious headwinds from rising interesting rates, according to Barron's. While many investors expected these securities to suffer lackluster performance last year, they generated robust returns of 22%. (For more, see also: Equity And Mortgage REITs.)
While mortgage REITs are no longer trading at inexpensive valuations, investors have singled out securities like MFA Financial, Inc. (MFA), Two Harbors Investment Corp (TWO) and Anworth Mortgage Asset Corporation (ANH) as having upward potential amid current market conditions, Barron's reported. Because of the kind of securities that Two Harbors Investment Corp and MFA Financial hold, their financial performance relies more on the health of the housing market, JPMorgan Chase & Co. (JPM) analyst Richard Shane wrote in a recent report, according to Barron's.
Rising Interest Rates
Many market observers expect interest rates to push higher going forward, but analyst Adham Sbeih, CEO, Socotra Capital, told Investopedia that "Any mortgage REIT that is either borrowing at a fixed rate or lending at a variable rate will do well in a rising rates environment." He added, "Additionally, non-traditional mortgage pools with variable rate loans will also do well in this environment." (For more, see also: How Interest Rates Affect The U.S. Markets.)
Considering the low yields that many fixed-rate securities are producing in the current environment, the returns produced by mortgage REITs might appear very favorable, according to analyst Christopher Dukes, who told Investopedia he has seen returns in the 5 – 6.5% range earlier this year. As interest rates climb, investors can hedge against the corresponding risk by gaining exposure to securities that benefit from such increases, Dukes, wealth manager at Dukes Financial, told Investopedia.