ETFs that invest in mortgage-backed securities rallied immediately following the Federal Reserve’s QE3 announcement although some analysts doubt whether the latest round of central bank bond buying will be enough to drive more upside.

Last week, the Fed said it will purchase more agency mortgage-backed securities at a pace of $40 billion a month.

“Beneficiaries of the Fed’s accommodative policy in the fixed income sector include both agency and non-agency MBS and asset-backed securities,” said Sterne Agee chief market strategist Sharon Stark in a note. “The Fed’s plans to add to its existing holdings of $843 billion Fannie Mae, Freddie Mac and Ginnie Mac MBS … comes at a time when supply is sparse and demand from financial institutions insatiable.”

The iShares Barclays MBS Bond Fund (NYSEArca: MBB) posted its biggest one-day price gain in 13 months last Thursday after the Fed announcement, reports Investors’ Business Daily.

The ETF tracks an index of U.S. investment grade agency mortgage-backed securities and offers a 30-day SEC yield of 3.2%, according to manager BlackRock.

“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,” investment researcher Morningstar says in a profile of MBB.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.