Top 3 Mortgage-Backed Securities (MBS) ETFs

When low interest rates are prevalent throughout the economy, there is usually an increased demand for mortgage loans. This increase generally results in more asset-based securities, which can increase the pool of high-quality assets in this investment category.

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).

Discover some of the most popular MBS ETFs that investors might turn to when rates are low.

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.

Mortgage Backed Securities ETFs

Mortgage-backed securities are created by restructuring a collection of illiquid mortgage 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.

MBS exchange-traded funds are bundles of mortgage-backed securities that trade on an exchange. These funds allow investors to gain exposure to the MBS market without worrying about the difficulties of buying and selling illiquid assets.

Here are the three most popular MBS ETFs to consider.

Mortgage-backed securities were less regulated in the past and contributed to the Great Financial Crisis. They have since become subject to more regulation, but they are still considered risky for retail investors.

The 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 U.S. MBS Index. The majority of the fund's holdings are concentrated in 30-year fixed-rate mortgages.

As of October 2022, the iShares MBS Bond ETF had $19.21 billion in assets. The fund had a 0.04% net expense ratio and a 2.62% 30-day SEC yield. The fund's holdings had an average yield to maturity of 5.10% and a weighted average maturity of 8.47 years. As of Oct. 21, 2022, its five-year total return was -0.99%, compared with -0.92% for its benchmark.

The 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 U.S. MBS Index by investing in the securities of the housing GSEs: FNMA, GNMA, and FHLMC.

As of October 2022, the SPDR Portfolio Mortgage Backed Bond ETF had $3.6 billion in assets. The fund had a 0.05% gross expense ratio and a 2.59% 30-day SEC yield. The fund's holdings had an average yield to maturity of 5.32% and average maturity of 8.4 years. As of Oct. 21, 2022, its five-year return was -2.26%, compared with -0.92% for its benchmark.

There are dozens of mortgage-backed securities ETFs to choose from. However, many attempt to mimic the same indexes. When you're choosing an ETF, ensure you compare their benchmarks.

The Vanguard Mortgage-Backed Securities ETF

The Vanguard Mortgage-Backed Securities ETF (VMBS) seeks to follow the performance of the Bloomberg 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 October 2022, the Vanguard Mortgage-Backed Securities ETF had $15.0 billion in assets. The fund had a 0.04% expense ratio. Its 30-day SEC yield was 2.82%. The fund's holdings had a yield to maturity of 4.5% and average effective maturity of 9.7 years. As of Oct. 21, 2022, its five-year return was -1.03%, compared with -0.89% for its benchmark.

Frequently Asked Questions

What Is a Mortgage Backed Security?

A mortgage-backed security is a securitized form of mortgage loans. The loans are pooled together, and a security is created, which can be traded on an exchange.

Are Mortgage Backed Securities a Good Investment?

Mortgage-backed securities can play a part in an investment portfolio; however, individual investors may have difficulty assessing the creditworthiness of the security issuer. This complexity adds additional risk that should be discussed with a professional financial advisor to see if an MBS fund is right for your financial circumstances.

What Is a Mortgage Backed Security ETF?

A mortgage-backed security exchange-traded fund is a fund made up of selected mortgage-backed securities. The fund is then traded on an exchange, allowing investors to gain exposure to bundles of mortgage-backed securities rather than single MBSs.

Article Sources
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  1. iShares. "iShares MBS ETF."

  2. State Street Global Advisors. "SPDR Portfolio Mortgage Backed Bond ETF."

  3. Vanguard. "Vanguard Mortage-Backed Securities ETF."

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