NEW YORK ( ETF Expert) -- "Sell in May" might not have been beneficial to those who made decisions based on seasonal probabilities. Yet, there's one asset class that has been taken out to the proverbial woodshed -- high-yielding mortgage REITs.
Mortgage REITs do not make money through the purchase of shopping malls, residences or office buildings. They borrow short-term debt to finance the acquisition of longer-term residential and commercial mortgage-backed securities. The profits come from the difference, or spread, between short-term and long-term rates. Mortgage REITs also benefit from the use of leverage.
Unfortunately, the recent chatter about the Federal Reserve tapering its quantitative easing program has hit mortgage REITs harder than nearly any other type of market-based security. That's because the Fed currently buys nearly $45 billion in U.S. Treasurys and $40 billion in mortgage-backed bonds every month, yet analysts have suggested that the central bank may reduce the purchase of mortgage-backed bonds first.
In truth, the chairman of the Federal Reserve, Ben Bernanke, is extremely unlikely to deviate from his current course of easing.That said, his recent "float-a-trial-balloon" commentary on the possibility of cutting back on the bond buying has sent the mortgage-backed security market into a tizzy. Both of the two major mortgage REIT exchange-traded funds s have dropped considerably from respective 52-week highs; each is threatening to fall below a 200-day long-term trendline.
|Mortgage REITs are Rapidly Losing Support|
|Approx % Below High|
|iShares FTSE Mortgage REIT (REM)||-9.6%|
|Market Vectors Mortgage REIT (MORT)||-9.4%|