Annaly Capital Earnings Put Mortgage REIT ETFs in Focus - ETF News And Commentary

The mortgage REIT sector had a pretty easy start to the year, thanks to the prevailing rock-bottom interest rates in spite of the Fed continuing to roll back its asset buying program. Falling yields worked favorably for the mortgage REITs which have performed decently so far this year.

This is because these types of companies borrow short-term debt and then use the capital to buy longer-term mortgage securities. Hence a wide (and stable) spread between the short and long term rates is crucial for their success. Though concerns have started building up lately over the hike in short-term interest rates, the Fed has promised to keep rates low at least for this year.

Also, top companies within the space have reported decent third-quarter 2014 earnings, either beating or meeting their Zacks Consensus Estimates for earnings. A few days back

's (

) third-quarter 2014 net spread and dollar roll income of 86 cents per share significantly exceeded the Zacks Consensus Estimate of 77 cents.

(

), however, reported earnings in line with our estimates, and we have discussed their recent results below (read:

).

The company reported earnings in line with the Zacks Consensus Estimate of 31 cents per share, slightly above the previous and year-ago quarter earnings of 30 cents per share.

Net interest margin for this quarter was 1.61% compared with 1.57% in the June quarter and 1.34% a year ago. However, the company said that its average yield on interest earning assets decreased for the reported quarter as compared to the preceding quarter. 

Higher amortization expense in the current quarter as a result of faster prepayment speeds was the primary force behind the falling yields (read:

).

“We welcome the end of Quantitative Easing and look forward to the opportunities it presents as the mortgage market begins to adjust to fewer direct policy impacts on fundamentals.” said Wellington J. Denahan, Chairman and CEO of Annaly. “We expect the market to endure higher levels of volatility but remain comfortable in our continued ability to deliver attractive relative returns.”

Following the earnings results, NLY shares gained roughly 1% after the market trading hours. Investors should thus keep a close eye on mortgage REIT ETFs having a sizable exposure to Annaly, as they will be in focus in the upcoming days. Also, most of the mREIT ETFs are up more than 1% following the earnings beat by AGNC. Below, we have highlighted some of the choices in this space:

(

)

REM tracks the FTSE NAREIT All Mortgage Capped Index, measuring the performance of the residential and commercial mREIT market in the U.S. The fund consists of 36 securities in its basket while it charges investors 48 basis points a year in fees (read:

).

NLY and AGNC are the top two holdings of the fund occupying 15.66% and 11.68% share, respectively. This suggests a huge concentration of fund assets among the top 10 holdings, with nearly two-thirds of assets going to the top 10 securities alone.

The fund has added 16.9% since the start of the year. Also, the product has a tremendous yield of nearly 12.8%. So it is suitable for investors seeking maximization of current income who are brave enough to bear volatility.

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NLY and AGNC occupy the top two spots here too, having a combined exposure of roughly 30%. 

The fund is relatively less popular with an asset base of $120.6 million and expenses of 41 basis points a year. The ETF tracks the Market Vectors Global Mortgage REITs Index, measuring the performance of companies primarily engaged in the purchase or service of commercial or residential mortgage loans.

The fund has gained roughly 18% in the year-to-date time frame. However, it has a lower dividend yield of 8.36% as compared to REM (see all

).

Though the above ETFs have easily outperformed the broader market funds this year, investors should nevertheless play these with caution.

Any rise in short-term yields would adversely affect their performance. A jump in rates would force REITs to pay higher amounts to borrow money which in turn would impact their dividend yields, and could be the trigger for a drop in these ETFs.

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