NEW YORK (TheStreet) --Mortgage REITs have posted strong gains in recent weeks amid what has otherwise been a sharp selloff in financial stocks.
Over the past month, Market Vectors Mortgage REIT Income ETF (MORT) has risen 4.05% while the Financial Select Sector SPDR (XLF) has fallen by 2.48%. Throw in a double digit annual dividend yield for MORT (it was 12.80% as of the end of March) and mortgage REITs' outperformance is even more marked.Mortgage REITs are investment vehicles that borrow short and lend long, enhancing returns through the use of leverage. They pay out 90% of their income in dividends. RBC Capital Markets Jason Arnold attributes the mortgage REIT rally to a weaker macroeconomic outlook and a recent flight to 10-year Treasuries which typically causes book values of Mortgage REITs to move higher. The weaker economic outlook also "reinforces the idea that rates really will stay low as long as [Federal Reserve Chairman Ben] Bernanke is suggesting they'll stay low. That in turn bodes really well for the return profiles of these businesses," Arnold says. Mortgage REITs Arnold favors include Annaly Capital Management (NLY),American Capital Agency Corp. (AGNC) and Hatteras Financial Corp (HTS), which invest primarily in mortgage-backed securities issued by U.S. government agencies. The major risk in investing in these names is the possibility of a sharp rise in the Fed funds rate or in long-term Treasury yields. A rise in the Fed funds rate would increase borrowing costs for these companies, while a rise in long term Treasury yields would cause the value of the mortgage REITs' portfolio to drop, since they own lower-yielding bonds. As long as the slow, unsteady recovery continues, however, mortgage REITs look like a good investment. >>To see these stocks in action, visit the 3 Financial Stocks With Huge Dividends for Weak Growth portfolio on Stockpickr. -- Written by Dan Freed in New York. Follow this writer on Twitter.
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