New York, NY – Investors looking to tap into the world of U.S. mortgage-backed securities may find the iShares MBS ETF to be a go-to option. This exchange-traded fund offers exposure to mortgage-backed securities primarily issued by government-sponsored entities such as Ginnie Mae, Fannie Mae, and Freddie Mac. Owned by them, Ginnie Mae stands apart from the latter two entities, with all three making up a significant portion of the ETF’s holdings.
The iShares MBS ETF operates as a passive fund, aiming to mirror the performance of the Bloomberg U.S. MBS Index without actively attempting to outperform it. This strategy involves holding a portfolio of securities that closely mimic the qualities of the index components. With 90% of its assets invested in index-included securities, the ETF incurs minimal annual expenses at 0.04%.
Despite its low expenses, the iShares MBS ETF has underperformed against the benchmark in various timeframes, signaling challenges beyond fees. One key factor influencing performance is the fund’s holdings of vintage low coupon bonds, leading to a significant gap between the weighted average coupon and the average yield to maturity. While the ETF offers a distribution yield of 3.77%, investors may find more attractive yields elsewhere, such as from newer bonds or other investment vehicles.
Investors considering adding the iShares MBS ETF to their portfolios should note that exposure to mortgage-backed securities may already exist through other investments, such as total market ETFs on the bond side. However, for those seeking specific allocation to MBS and willing to navigate the unique risks associated with these securities, a position in MBB might be worth exploring.
It is crucial for investors to conduct thorough due diligence and seek professional advice tailored to their specific objectives and constraints before making investment decisions. While the potential for additional spread offered by Mortgage Backed Securities may be enticing, understanding the nuances and risks associated with these investments is paramount for a well-informed investment strategy.
