Mortgage REITs have become a hot topic as Wall Street firms have boosted coverage of this specialized slice of the stock market amid a flurry of IPOs over the past two years or so. These companies are potentially worthy investments, even for risk-averse clients.

However, it's important to understand how to analyze mortgage REITs, which really operate like levered bond funds. Knowing how a given fund's portfolio will be affected by changing interest rate environments and what hedging strategies the fund managers are using is essential.

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