🏠 Mortgage-Backed Securities ETFs
🏠 Mortgage-Backed Securities ETFs
Mortgage-backed securities (MBS) are bonds backed by pools of home mortgages. They offer a unique combination of housing market exposure and prepayment risk.
The prepayment problem
MBS have negative convexity — they behave asymmetrically:
| Rate Environment | What Happens |
|---|---|
| Rates fall sharply | Homeowners refinance — you get principal back early (at the worst time) |
| Rates rise sharply | No refinancing — duration extends, you’re stuck longer |
This asymmetry is why MBS yields are higher than comparable treasuries.
ETFs compared
| ETF | Duration | Expense | Best For |
|---|---|---|---|
| MBB | ~5.9 years | 0.04% | Benchmark, liquid |
| VMBS | ~5.7 years | 0.04% | Broad MBS |
| SPMB | ~5.8 years | 0.03% | Lowest cost |
| GNMA | ~5.3 years | 0.10% | Government guaranteed |
MBB vs VMBS: Nearly identical — pick based on brokerage. All agency MBS are effectively government-guaranteed.
Fed policy indicator
The Fed owns trillions in MBS, making it the dominant holder:
| Fed Action | MBS Impact |
|---|---|
| Buying MBS | Spreads tighten, supportive |
| Selling/runoff | Spreads may widen |
| QE expansion | Positive for prices |
| QT | Negative for prices |
When to use MBS
| Use Case | Works? |
|---|---|
| Fed policy exposure | Yes |
| Yield above treasuries | Yes (modest spread) |
| Housing market view | Yes (indirect) |
| Avoiding credit risk | Yes (agency-backed) |
| Duration bet | No — use treasuries (no negative convexity) |
Quick reference
| Goal | ETF |
|---|---|
| Broad MBS exposure | MBB, VMBS |
| Lowest cost | SPMB |
| Government guaranteed (GNMA) | GNMA |
MBS offer modest yield pickup over treasuries with housing exposure. The prepayment dynamics create negative convexity — you benefit less from rate drops than you lose from rate rises.
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