Mortgage ETFs Explained

Mortgage ETFs are a type of exchange-traded fund that allows investors to gain exposure to the mortgage-backed securities market.

These securities are created when a lender originates a mortgage and packages it with other similar loans, then sells the package to investors.

Mortgage ETFs can provide a way for investors to diversify their portfolios and potentially earn income through interest payments.

Investors can choose from a range of mortgage ETFs that track different segments of the mortgage market, such as government-backed or private-label securities.

Some mortgage ETFs also offer the potential for capital appreciation, as the value of the underlying securities can fluctuate based on market conditions.

If this caught your attention, see: Commercial Mortgage Backed Securities Loans

A mortgage ETF, or exchange-traded fund, is a fund made up of selected mortgage-backed securities. It's traded on an exchange, allowing investors to gain exposure to bundles of mortgage-backed securities rather than single MBSs.

These funds are designed to provide investors with a diversified portfolio of mortgage-backed securities, which can offer a stable source of income and potential price appreciation.

Consider reading: Whats an Etfs

Mortgage-backed security ETFs can be a good option for investors looking to add fixed income to their portfolio, as they can provide a relatively low-risk investment opportunity.

Here are some examples of popular mortgage ETFs:

By investing in a mortgage ETF, you can gain exposure to the mortgage-backed securities market without having to buy individual securities, which can be a more complicated and time-consuming process.

Investing in mortgage ETFs can be a great way to diversify your portfolio and earn a steady income. The iShares MBS Bond ETF (MBB) is a good option for investors looking to invest in fixed-rate mortgage pass-through securities.

The iShares MBS Bond ETF has a 0.04% net expense ratio and a 2.62% 30-day SEC yield, making it an attractive choice for investors. Its holdings have an average yield to maturity of 5.10% and a weighted average maturity of 8.47 years.

The Vanguard Mortgage-Backed Securities ETF (VMBS) is another popular option, with a 0.04% expense ratio and a 2.82% 30-day SEC yield. Its holdings have a yield to maturity of 4.5% and an average effective maturity of 9.7 years.

Both ETFs track the performance of a specific index, with the iShares MBB tracking the Bloomberg U.S. MBS Index and the Vanguard VMBS tracking the Bloomberg U.S. MBS Float Adjusted Index.

Discover more: Options Income Etfs

The iShares MBS Bond ETF has a significant presence in the mortgage-backed securities market, and understanding its holdings can provide valuable insights for investors.

The fund's holdings are concentrated in fixed-rate mortgage pass-through securities issued by major players in the industry, including the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

The majority of the fund's holdings are in 30-year fixed-rate mortgages, which is reflected in the fund's weighted average maturity of 8.47 years.

The fund's holdings are also diversified across different issuers, with the top three issuers being FEDERAL NATIONAL MORTGAGE ASSOCIATION (43.24%), FEDERAL HOME LOAN MORTGAGE CORPORATION (30.61%), and GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (21.17%).

Here's a breakdown of the fund's holdings by issuer:

These holdings provide a solid foundation for investors looking to gain exposure to the mortgage-backed securities market.

The Price Yield Calculator is a powerful tool for investors looking to assess the performance of Mortgage ETFs. It provides an indication of an ETF's yield and duration for a given market price.

The calculator estimates the ACF Yield, which is the discount rate that equates the ETF's aggregate cash flows to a given ETF price. This is based on the yield to worst methodology, which assumes cash flows occur at the call date or maturity, whichever results in the lowest yield.

For example, as of January 31st, 2025, the ACF Yield for a specific ETF is 5.26%. This means that investors can expect to earn a return of 5.26% if they buy the ETF at the current market price.

Modified duration is another important metric that the calculator provides. In this case, the modified duration is 5.55 years, indicating that the ETF's price is expected to change by approximately 5.55% for a 1% change in interest rates.

The spread of the ACF Yield over the 7-year Treasury Yield is also a useful metric. As of January 31st, 2025, this spread is +84 bps, indicating that the ETF's yield is higher than the Treasury Yield.

Here's a quick summary of the calculator's output:

Let's take a look at some key statistics about mortgage ETFs. The Angel Oak Mortgage-Backed Securities ETF (MBS) was launched on February 16, 1924.

The inception date of the Angel Oak Mortgage-Backed Securities ETF (MBS) was 2/16/24.

For more insights, see: What Is a Mortgage Backed Bond

The Angel Oak Mortgage-Backed Securities ETF has a unique history, as it was created by reorganizing the Angel Oak Total Return Bond Fund on February 16, 2024.

The ETF adopted the accounting and performance history of its predecessor mutual fund, which had an inception date of June 4, 2021.

Recommended read: History of Esg Investing

The Angel Oak Mortgage-Backed Securities ETF (MBS) was launched on February 16, 2024.

The iShares MBS Bond ETF (MBB) has $19.21 billion in assets as of October 2022.

It has a 0.04% net expense ratio.

The Vanguard Mortgage-Backed Securities ETF (VMBS) had $15.0 billion in assets as of October 2022.

The iShares MBS Bond ETF (MBB) had a 30-day SEC yield of 2.62% as of October 2022.

The Vanguard Mortgage-Backed Securities ETF (VMBS) had a 30-day SEC yield of 2.82% as of October 2022.

The iShares MBS Bond ETF (MBB) tracks the performance of the Bloomberg U.S. MBS Index.

The Vanguard Mortgage-Backed Securities ETF (VMBS) seeks to follow the performance of the Bloomberg U.S. MBS Float Adjusted Index.

The iShares MBS Bond ETF (MBB) had an average yield to maturity of 5.10% as of October 2022.

The Vanguard Mortgage-Backed Securities ETF (VMBS) had a yield to maturity of 4.5% as of October 2022.

Take a look at this: Bloomberg Aggregate Bond Index Etf

MBS Negative Convexity is a phenomenon that affects the performance of Mortgage Backed Securities (MBS). This means that when mortgage rates go up, the price of MBS goes down by a greater amount than it goes up when rates fall.

For example, in the three years leading up to November 2018, MBB shares fell by 6.5% despite a rise in mortgage rates of just under one percentage point. This shows how sensitive MBS prices can be to changes in interest rates.

Mortgage rates rose significantly after November 2018, and yet MBB shares still managed to increase by 6.26% over the following three years. This is surprising, given the large drop in mortgage rates of nearly 1.8 percentage points during that period.

The key factor at play here is refinancing, which shortens the maturity of mortgages when rates fall. However, when rates rise, the expected maturity of the mortgage becomes longer, causing MBS prices to fall more sharply.

Here are some specific statistics that illustrate the impact of negative convexity on MBS:

These statistics demonstrate the asymmetrical relationship between mortgage rates and MBS prices, which is a key characteristic of negative convexity.

The iShares MBS Bond ETF (MBB) is a popular choice for investors, with $19.21 billion in assets as of October 2022.

Its holdings are concentrated in 30-year fixed-rate mortgages, and the fund aims to track the performance of the Bloomberg U.S. MBS Index.

The Vanguard Mortgage-Backed Securities ETF (VMBS) is another well-known option, with $15.0 billion in assets as of October 2022.

It seeks to follow the performance of the Bloomberg U.S. MBS Float Adjusted Index and has a dollar-weighted average maturity of three to 10 years.

The SPDR Portfolio Mortgage Backed Bond ETF (SPMB) also invests in mortgage-backed securities, with $3.6 billion in assets as of October 2022.

These three ETFs have a significant weighting towards mortgage-backed securities, with MBB allocating approximately 99% of its portfolio to MBS and 1% to cash.

Here are some key statistics for these popular mortgage ETFs:

These ETFs have been affected by changes in interest rates, with MBB's value rising as rates fell and vice versa.