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As another disappointing jobs report spurs the Federal Reserve to renew its talk of quantitative easing and further depressing interest rates, many investors are tearing their hair out. Money market funds are getting hammered both here at home and across the pond, but don't despair -- there is a bright spot on the investment horizon: mortgage REITs.
The same events that cause distress for other funds can actually give mREITs a boost. Low interest rates look like they are here to stay at least until 2014, which means that these companies will continue to make money on the spread between short- and long-term interest rates. Even if rates start to rise in late 2014, chances are good that it will be a slow uptick over a long period of time, which would be better for REITs than an interest rate spike.
I read an article recently that gives a nice explanation of how these entities make their money, using American Capital Agency (Nasdaq: AGNC ) as an example. American Capital invests primarily in mortgages backed by Fannie and Freddie -- pretty safe, but not a super-high yield. By making use of repurchase agreements, the company has been able and should continue to turn a nice profit, as long as interest rates stay low. The nearly 15% yield shows just how successful this scenario can be.
Perennial favorite Annaly Capital Agency (Nasdaq: NLY ) is another successful mREIT that makes money in this manner, and sports a yield of 13%. But making money in this way is not without risk, as fellow Fool Alex Dumortier points out. Annaly's been around for a long time, certainly, and has been very successful. The recent LIBOR scandal may affect these REITs, however, since swaps they use to hedge risk are tied to that rate. And leverage is heavily employed by most mREITs. Time will tell, but these are all things that investors need to know, in order to make an informed decision about whether or not to invest in these stocks.
As others note, though, mREITs are some of the very few investments that will garner you a decent return in this low-interest-rate environment, and thus are great to add to your portfolio. In addition, companies like Newcastle Investment (NYSE: NCT ) , which teamed up with NationStar Mortgage (NYSE: NSM ) to purchase mortgage servicing rights from Bank of America (NYSE: BAC ) , are definitely worth a look. Big banks like B of A are shedding these lucrative servicing rights, and I think you'll see more mREITs partnering with mortgage companies like NationStar to cash in on this phenomenon.
All investments involve risk, but knowing what you're jumping into before you jump is always the best policy, so do your due diligence on these REITs. If you're looking for investments for the next few years, you could do a lot worse than mREITs. At minimum, I would say that adding a smattering of your favorites to your investment profile would be a good hedge against times when everything else, including the economy, looks to be stuck in second gear for the foreseeable future.
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