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A New ETF Gets Active With Mortgage-Backed Securities

ETF Professor

If there was a corner of the fixed income exchange traded funds space that could use a breath of fresh air or a shot in the arm, a case can be made that it's the group of funds offering exposure to mortgage-backed securities. 

What Happened

The WisdomTree Mortgage Plus Bond Fund (NYSE: MTGP), which debuted Thursday, may just be that breath of fresh air.

Most MBS ETFs are passive index funds, which is beneficial in terms of keeping costs low, but the strategy isn't tactical in an area of the bond market where being tactical can offer investors rewards.

MTGP is sub-advised by securitized debt giant Voya Investment Management Co., which has $31 billion in assets under management.

Why It's Important

“MTGP is an actively managed ETF that primarily invests in agency residential and commercial mortgage-backed securities while having the flexibility to diversify into other sectors of the securitized debt market,” according to a statement issued by New York-based WisdomTree Investments (NASDAQ: WETF).

The new ETF has an effective duration of 3.51 years, with an average time to maturity of 5.87 years, according to issuer data. MTGP, the latest addition to WisdomTree's lineup of fixed income funds, debuted with about $10 million in assets.

MTGP has an embedded income yield of 2.87% and a weighted average coupon of 3.57%. It came to market with 14 holdings, nearly 97% of which are rated AAA, AA or A. MBSs with BBB ratings comprise just over 3% of the portfolio.

What's Next

“We believe MTGP may be a compelling strategic option for investors seeking a generally more stable source of income through the types of mortgage-backed securities that have historically exhibited strong liquidity and limited credit risk,” Rick Harper, WisdomTree Head of Fixed Income and Currency, said in the statement.

While the recent boom in corporate debt issuance amid today's low interest rates is grabbing plenty of attention, that scenario could create opportunity with MTGP.

“While there exists a correlation between markets, the lack of substantial growth in mortgage securities relative to corporate debt can potentially provide a supportive credit environment for investors and generally attractive valuations,” according to WisdomTree.

The new ETF charges 0.45% per year, or $45 on a $10,000 investment.

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