Mortgage-backed securities (MBS) represent an asset class with a troubled history. Many investors and analysts argue that MBS precipitated the 2008 financial crisis. This doesn't mean, however, that MBS as an asset class are without potential for investors in 2018. It does suggest, perhaps, that investors focused in this area should be watchful and mindful of the potential for further harm to the global economic system, though.
In mid-September, Janus Henderson took an important step toward bringing MBS back into the mainstream of the investment world when it launched the first actively managed MBS exchange-traded fund (ETF). The Janus Henderson Mortgage-Backed Securities ETF (JMBS) aims to bring the MBS space to one of the most popular realms of the investment world of today: ETFs. (For a quick refresher, check out: Understanding Mortgage-Backed Securities.)
A Broad Variety of MBS Exposure
According to ETF.com, JMBS focuses its investments in mortgage-backed fixed-income instruments. Within this category, there is a surprisingly diverse array of products, including instruments with different maturities, those representing residential and commercial MBS, and even ETFs that invest in MBS as an asset class. Among the securities represented in the JMBS basket are those that offer exposure to government- and agency-issued debt as well as privately issued debt.
The fund managers retain the prerogative to invest in securities of different ratings, according to the report, although the portfolio generally focuses on investment-grade debt. (See also: Asset-Backed and Mortgage-Backed Securities: An Introduction.)
JMBS managers will attempt to outperform the Bloomberg Barclays US MBS Index Total Return Value Unhedged USD by 0.50%, net fees. In order to achieve this aim, the managers will utilize a bottom-up approach in selecting securities, and they may incorporate derivatives as well as shorting strategies.
JMBS joins a growing field of MBS-related ETFs, although it is the first of its kind to be actively managed. There were five passively managed MBS ETFs that traded in the U.S. at the time that JMBS was launched. The most sizable of these other products is the iShares MBS ETF (MBB). Active since March 2007 and with a whopping $12 billion in assets under management (AUM), MBB maintains an expense ratio of 0.09%.
Along with the active management aspect of JMBS, investors can also expect a commensurately higher set of fees. JMBS is set to feature an expense ratio of 0.35%, making it the most costly of the six current MBS ETFs available to U.S. investors. However, for some investors, the prospect of having an MBS fund that is actively managed may outweigh the heightened fee structure. After all, given the potential for MBS products to jostle the markets, investors may feel safer with managers taking a more proactive approach.
Broadly, JMBS is one of the latest examples of the growing trend of active management in the ETF space. Actively managed ETFs have managers or teams to watch over the fund's portfolio allocation. In some ways, active management goes against the traditional structure of an ETF. Most ETFs remain passively managed, in part in order to keep costs to investors as low as possible so that the funds can remain competitive compared with index and mutual funds. (For more, see: Active vs. Passive ETF Investing.)
So long as these actively managed funds continue to be able to provide reasonable expense ratios compared with traditional passive competitors, as well as benchmark-beating returns, they are likely to remain popular. Regardless of the management strategy for MBS ETFs, these funds are likely to retain higher levels of risk than other vehicles in the ETF space as a result of the assets they hold. MBS are known as a complex, risky type of security. To investors interested in the MBS space, an ETF can nonetheless offer an easy access point. (For additional reading, check out: The Risks of Mortgage-Backed Securities.)