Make Money in High-Yielding Mortgage REITs the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the U.S. mortgage REIT industry to prosper over time, the iShares FTSE NAREIT Mortgage Plus Capped Index Fund ETF (NYS: REM) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.48%. It also sports a tantalizing 12% dividend yield.

This ETF has not been an outstanding performer, but it's also very young, with just a few years on the books. It underperformed the S&P 500, on average, over the past three years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Several mortgage REITs had strong performance over the past year. Annaly Capital  (NYS: NLY) gained 8%, with its near-term future looking bright, as it profits by investing in properties with borrowed money, and interest rates are poised to remain low for at least a few more years. The low-interest-rate advantage holds for other mortgage REITs, too, such as American Capital Agency (NAS: AGNC) -- and makes them intriguing candidates for an IRA. Amercian Capital gained 23% over the past year and was recently yielding an eye-popping 19% -- but some worry about its debt load and see the high dividend yield as a red flag. ARMOUR Residential REIT (NYS: ARR) , up 11%, sports another risky yield and steep leverage.

Some rationalize that even if these hefty yields are cut in half, they'll be appealing, but others point out that even with massive dividends, many of these companies have lost value for shareholders. It can pay to focus on the most healthy yields you can find -- or to diversify some of your risk via an ETF.

Other companies didn't do as well last year, but could have an effect in the years to come. Chimera Investment (NYS: CIM) shed 16%, and while it does carry less debt, it also invests in riskier mortgages than peers such as Annaly Capital. Recently, more than 80% of its assets were rated as junk debt or were unrated.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn about the "5 ETFs That Could Soar in 2012." And if you're looking for some great investments beyond ETFs, consider these "12 Dividend Stocks for 2012."

At the time this article was published

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