Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Mortgage Lessons of the Past Are Quickly Forgotten in This ETF

The number four mREIT in the Market Vectors Mortgage REIT Income ETF, with a weight of 5%, is MFA Financial, Inc. (NYSE:MFA). Unlike the majority of the larger weighted mREITs, MFA Financial, Inc. (NYSE:MFA) carries a debt-to equity ratio of 2.92-to-1. This mREIT is not carrying the expanded leverage like some of the counterparts of this ETF. The dividend rate is at 9.53%, and it has given a one-year return of 42.26%. See the snapshot and chart below. Out of these four mREITs, this is the one that deserves a closer look.

Leverage within the mREITs and weightings appear to be the catalysts that may harm the Market Vectors Mortgage REIT Income ETF. This ETF, and perhaps the underlying index, did not take into consideration the risk associated with expanded leverage to enhance returns. The gross spread between the assets held and the cost of debt to hold these positions, less management expenses, is what passes to the shareholders. The gap between what is tolerable and what would be disastrous is not that wide.

With the outlook of a reduction in quantitative easing ending, how far short-term interest rates will change is unknown. In conclusion, the best suggestion is to completely dissect this ETF and find some of the few gems that may be buried among the other holdings. Those that are somewhat immune to interest rate increases may offer a vehicle for the income oriented investor. When will the financial engineers of Wall Street ever learn and not create a modified strategy based on flaws from the past?

The article Mortgage Lessons of the Past Are Quickly Forgotten in This ETF originally appeared on Fool.com and is written by Jeff Stouffer.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.