IYR is an ETF of REITs that deal with both residential and commercial properties, while MORT is an ETF that deals with mortgage REITs or invests in mortgage-backed securities (MBS) or even originate mortgages.
MORT and IYR are very different animals, even though both are called “REIT” ETFs. REITs included in IYR invest in properties, while mortgage REITs are specialists at the funding games that allow them to use high amounts of leverage to get the maximum possible payout to their shareholders. As a result, IYR yields 4.1% while MORT yields much more, 10.6% (using the same 30-day SEC yield measure).
I like the MORT yield, as it is one of the few double-digit yields available. I am not fond of the amount of repo leverage employed by mortgage REITs, as it can significantly vary by company and types of MBS used in the process. Still, I have to admit that there is a level of diversification in the REIT ETF structure that can help investors that are not sophisticated enough to sift through different types of mortgage REIT filings to figure out how much they are levered and/or if their particular types of MBS are at bigger risk.
It is not surprising that MORT has begun to under-perform IYR after the tapering panic erupted in May of 2013. Keep in mind that this is only price-based under-performance. If we include the higher dividend of MORT, the performance gap would significantly narrow.
I think that investors feared that QE tapering would disrupt the bond market to the point where relentless repo-funding, popular with mortgage REITs, will become too expensive due to the rising haircuts when repo-ing MBS (or the discount that the funding bank applies to the MBS deposited as collateral to extend mortgage REIT funding).
As that repo-funding mechanism proved to still work in the present environment, the MORT/IYR performance gap may close.