Investors Should Be Careful With AGNC Investment. Here's Why

One of the worst-performing sectors this year is the one associated with mortgages. Mortgage originators saw major declines in origination volumes as rising interest rates removed the consumer's incentive to refinance. Mortgage real estate investment trusts (REITs) have also been beaten down this year as interest rates have increased.

Investors looking at the sky-high dividend yields on mortgage REITs should be careful.

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Mortgage REITs are unlike most REITs

AGNC Investment (AGNC -2.08%) is a mortgage REIT, which differs from a typical REIT. Most REITs follow a landlord/tenant business model, where the REIT develops properties and then leases them out. Mortgage REITs don't invest in physical real estate, they invest in real estate debt (i.e., mortgages). In many ways, their business model is similar to a bank. Mortgage REITs like AGNC Investment will borrow money and invest in mortgage-backed securities, which contain thousands of individual mortgages. If you recently bought a house and you used a mortgage loan guaranteed by Fannie Mae or Freddie Mac, chances are it ended up in a mortgage-backed security, which might be held by a mortgage REIT.