Given the enormity of its market size, it would serve a fixed income investor well to explore opportunities in mortgage-backed securities (MBS) if they haven’t already. The space is expanding and undergoing electronification, making it larger as well as more efficient.
As explicitly mentioned by Tradeweb, the size of the U.S. MBS market makes it one of the largest and most liquid markets globally. By the end of last year’s third quarter, issuance of MBS securities hit $1.1 trillion. That represented a 12.5% increase year over year.
One of the downfalls of MBS securities has been relative price illiquidity. However, times are changing as the space is embracing more electronic methodologies for trading. That’s making it more accessible to fixed income investors of all types.
“Although some products within the asset class are notoriously illiquid, and trading mechanisms are in need of modernization, tides are changing as investment professionals and traders alike embrace more electronification,” according to Tradeweb.
“We expect a jump in MBS electronification in the next few years motivated by similar forces—efficiency, enhanced transparency and evolving TRACE (Trade Reporting and Compliance) reporting requirements,” it added.
This corner of the fixed income market is undergoing technological advancement. Therefore, it’s an ideal opportunity to explore ETFs that operate in the MBS space.
An All-Inclusive MBS Option
The advent of ETFs has allowed retail investors to access the MBS market that was once only available to high net worth or institutional investors. One fund worth considering is the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS ).
For cost-conscious fixed income investors, the fund offers a low 0.03% expense ratio. To help minimize credit risk, VMBS holdings focus on MBS issued by government-owned corporations like Ginnie Mae and government-sponsored enterprises like Fannie Mae. Both of these quasi-government entities help to provide liquidity in the mortgage market by buying and selling mortgages in the secondary market. Their role is essential. Thus, this backing adds to the relative quality of these assets.
Salient Features of VMBS
- Aims to provide a moderate and sustainable level of current income.
- Invests primarily in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC)
- Over 1,400 bonds for diversification
- Holdings consist of an average effective maturity of 7.5 years and average duration of 5.4 years
- 30-day SEC yield of 4.10% as of February 7
For more news, information, and analysis, visit the Fixed Income Channel.
