ETFs that specialize on mortgage-backed securities are an option for fixed-income investors seeking rates above those offered by U.S. Treasuries (MBS).
Mortgage-backed securities are created by consolidating a number of inflexible loans into a single tradable product. The quality of the credit tied to the underlying pool of loans determines how well the securities are rated. Lower-rated securities have higher coupon rates to entice investors, and coupons are issued depending on loan ratings.
Government-sponsored enterprises (GSEs) including Ginnie Mae, Freddie Mac, and Fannie Mae offer agency mortgage-backed securities. Because an intermediary transfers payments from the issuer to the security holders, they are known as pass-through securities.
There will probably be greater demand for home loans in an environment with low interest rates, which will lead to the creation of additional asset-based securities. The number of high-quality assets in this investment category may grow as a result. The three ETFs that invest in mortgage-backed securities are examined below.
- Agency mortgage-backed securities (MBS) are issued by government-sponsored enterprises such as Fannie Mae, Freddie Mac, and Ginnie Mae.
- An MBS is a pass-through security, because an intermediary passes through payments from the issuer to the security holder.
- Essentially, an investor with exposure to an MBS receives a stream of payments from homeowners paying interest on their mortgages.
- ETFs with a concentration on mortgage-backed securities provide fixed-income investors a handy method to access this market.
iShares MBS Bond ETF
Investors wanting to purchase fixed-rate mortgage pass-through securities from the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA), and the Federal Home Loan Mortgage Corporation can consider the iShares MBS Bond ETF (MBB) (FHLMC).
The fund seeks to provide performance to investors that mirrors that of its benchmark, the Bloomberg U.S. MBS Index. Mortgages with 30-year fixed rates make up the bulk of the fund’s assets.
The iShares MBS Bond ETF has $25.79 billion in assets as of April 2021. The fund’s 30-day SEC yield was 1.13%, and its net expense ratio was 0.06%. The average yield to maturity of the fund’s holdings was 1.50%, and their weighted average maturity was 4.77 years. Its five-year total return was 2.30% as of March 31, 2021, vs 2.43% for its benchmark.
SPDR Portfolio Mortgage Backed Bond ETF
The aforementioned analogue is the SPDR Portfolio Mortgage Backed Bond ETF (SPMB). By purchasing assets from FNMA, GNMA, and FHLMC, it also aims to replicate the price and yield performance of the Bloomberg U.S. MBS Index.
The SPDR Portfolio Mortgage Backed Bond ETF has $3.40 billion in assets as of April 2021. The fund’s 30-day SEC yield was 0.66%, and its net expense ratio was 0.04%. The average yield to maturity of the fund’s assets was 1.66%, and their average maturity was 4.59 years. Its five-year return was 2.25% as of March 31, 2021, vs 2.43% for its benchmark.
Vanguard Mortgage-Backed Securities ETF
The Bloomberg U.S. MBS Float Adjusted Index performance is what the Vanguard Mortgage-Backed Securities ETF (VMBS) aims to track. The fund has a dollar-weighted average term of three to ten years and modest interest rate risk.
As of February 2021, the Vanguard Mortgage-Backed Securities ETF had $15.4 billion in assets. The fund had a 0.05% expense ratio. Its 30-day SEC yield as of April 2021 was 0.68%. The fund’s holdings had a yield to maturity of 1.5% and average effective maturity of 4.7 years. As of March 31, 2021, its five-year return was 2.32%, compared with 2.40% for its benchmark.
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