New Mortgage REIT ETF Highlights Double-Digit Dividend Yields (MORT, NLY, AGNC, CIM, MFA, HTS)

Investors now have yet one more option to choose from when it comes to investing in mortgage REITs.  Van Eck Global has now launched the Market Vectors Mortgage REIT Income ETF (NYSE: MORT) as a pure-play ETF giving exposure to mortgage REITs.  Now that Treasury yields are nothing and investors are having to chase yields, the mortgage REIT sector’s high yields are still keeping investors interested.

The new ETF tracks the performance of the Market Vectors Global Mortgage REITs Index.  The underlying index has 25 constituents and is a market cap-weighted index where the companies have to derive at least half of their revenues from mortgage REITs. The allowance can include those which purchase or service commercial or residential mortgage loans or mortgage-related securities.  Van Eck noted, “Unlike other indexes used in mortgage REIT-focused ETFs, the Index does not include mortgage finance companies or savings associations.”

The weighting of the top-5 members in the index is as follows (as of July 31, 2011): Annaly Capital Management, Inc. (NYSE: NLY) at 19.73%; American Capital Agency Corp. (NASDAQ: AGNC) at 11.46%; Chimera Investment Corporation (NYSE: CIM) at 7.27%; MFA Financial, Inc. (NYSE: MFA) at 6.07%; and Hatteras Financial Corporation (NYSE: HTS) at 5.04%.  The top five of the twenty-five constituents account for just over 49.5% of the entire weighting.

This new ETF has a gross expense ratio of 0.54% and a net expense ratio of 0.40%, with expenses capped at 0.40% until May 1, 2013.

What makes this interesting is that all five of the top constituents carry a yield of well above 10% based on the last dividend payments.  These underlying entities are required to distribute 90% of their income as dividends to investors, so the returns can fluctuate wildly.

With a promise from Ben Bernanke to keep rates at near-zero for the next two years, the spread between short-term borrowings and leveraging up for mortgage yields is likely to keep the environment positive for entities such as these.  The problem is when the short-term borrowing rates go back up.  When… If…

JON C. OGG