Mortgage-Backed ETFs Rise in Wake of QE3

ETF Trends

Some investors are using ETFs that track mortgage-backed securities to take advantage of the Federal Reserve’s latest round of bond buying designed to stimulate the U.S. economy.

Earlier this month, the Fed announced its third installment of quantitative easing, or QE3. The central bank said it will purchase more agency mortgage-backed securities at a rate of $40 billion a month to support the market for real estate loans. [Mortgage-Backed Securities ETFs and QE3]

Jeffery Timlin, a fixed-income portfolio manager at Sage Advisory Services, tells Dow Jones he had been building positions in iShares Barclays MBS Bond Fund (MBB) , which holds $6 billion in assets. [ETF Spotlight: Mortgage-Backed Securities]

MBB surged on the day the Fed announced QE3 and has been trending higher in September.

Yet in the report, Timlin said QE3 expectations were already baked into MBS prices while “at current levels market valuations appear fairly rich” in the related ETFs.

“If you’re looking to get into that side of the trade now, you’ve already missed a lot of the easy pickings in MBS markets,” he told Dow Jones.

MBB tracks an index of U.S. investment grade agency mortgage-backed securities and pays a 30-day SEC yield of about 3%.

“Government-sponsored mortgage bonds typically pay more interest than do comparable U.S. Treasury bonds. However, because homeowners can refinance or sell their homes at any time, mortgage-bond cash flows are very unpredictable. This ‘prepayment risk’ is why the bonds pay higher interest rates,” Morningstar analyst Timothy Strauts writes in a profile of the fund.

Other ETFs that invest in the sector include SPDR Barclays Capital Mortgage Backed Bond ETF (MBG), Vanguard Mortgage-Backed Securities ETF (VMBS), iShares Barclays CMBS Bond Fund (CMBS) and iShares Barclays GNMA Bond Fund (GNMA).

iShares Barclays MBS Bond Fund (MBB)

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The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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