Fixed-income investors looking for higher yields than U.S. Treasuries might consider investing in an exchange-traded fund (ETF) that focuses on mortgage backed securities (MBS).

Mortgage-backed securities developed by restructuring a collection of illiquid loans into a single tradeable security. The securities are rated by the quality of the credit attached to the underlying pool of loans. Coupons are assigned based on the loan ratings, with lower-rated securities having higher coupon rates to attract investors.

Agency mortgage-backed securities are issued by government-sponsored enterprises (GSE) such as Fannie Mae, Freddie Mac, and Ginnie Mae. They are referred to as pass-through securities, because an intermediary passes through payments from the issuer to the security holders.

In an environment of low interest rates, there will likely be increased demand for mortgage loans, resulting in the establishment of more asset-based securities. This could potentially increase the pool of high-quality assets in this investment category. Below, we look at three ETFs that invest in mortgage-backed securities.

Key Takeaways

  • 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 that focus on mortgage-backed securities provide a convenient way for fixed-income investors to get exposure to this market.

iShares MBS Bond ETF

The iShares MBS Bond ETF (MBB) is a good option for investors looking to invest in fixed-rate mortgage pass-through securities issued by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

The fund aims to provide investors with results that track the performance of its benchmark, the Bloomberg Barclays U.S. MBS Index. The majority of the fund's holdings is concentrated in 30-year fixed-rate mortgages.

As of March 2021, the iShares MBS Bond ETF had $26.45 billion in assets. The fund had a 0.06% net expense ratio and a 1.23% 30-day SEC yield. The fund's holdings had an average yield to maturity of 1.51% and a weighted average maturity of 4.59 years. As of December 31, 2020, its five-year total return was 2.93%, compared with 3.05% for its benchmark.

SPDR Portfolio Mortgage Backed Bond ETF

The SPDR Portfolio Mortgage Backed Bond ETF (SPMB) is similar to its counterpart above. It also seeks to match the price and yield performance of the Bloomberg Barclays U.S. MBS Index by investing in the securities of the housing GSEs: FNMA, GNMA, and FHLMC.

As of March 2021, the SPDR Portfolio Mortgage Backed Bond ETF had $3.36 billion in assets. The fund had a 0.04% net expense ratio and a 0.78% 30-day SEC yield. The fund's holdings had an average yield to maturity of 1.73% and average maturity of 4.59 years. As of February 28, 2021, its five-year return was 2.37%, compared with 2.59% for its benchmark.

Vanguard Mortgage-Backed Securities ETF

The Vanguard Mortgage-Backed Securities ETF (VMBS) seeks to follow the performance of the Bloomberg Barclays U.S. MBS Float Adjusted Index. The fund comes with moderate interest rate risk, with a dollar-weighted average maturity of three to 10 years.

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 March 2021 was 1.04%. The fund's holdings had a yield to maturity of 1.5% and average effective maturity of 4.7 years. As of February 28, 2021, its five-year return was 2.46%, compared with 2.55% for its benchmark.