Anyone from the outside looking in at the markets this year would likely assume that “things are getting better” in the U.S. housing market, as ETFs such as ITB (iShares DJ U.S. Home Construction) has rallied a jaw dropping 81% YTD, and related ETF XHB (SPDR Homebuilders) is up 49.53% during the same time period.

Gradual loosening of lending policies as well as new mortgage applications simply being closed quicker in recent months has corresponded well with Fed policies of open MBS purchases and low borrowing rates at least for the foreseeable future. Thus, a related segment of the market that we examine today via linked ETFs is Mortgage Backed Securities products.

Now it is important to note that the ETF products in this segment are not simply relegated to Residential mortgages, but Commercial mortgages as well. So in short, these ETFs are not exactly “apples to apples” when compared to each other, but provide different exposures to the mortgage backed markets.

MBB (iShares Barclays MBS Fixed Rate Bond) is the behemoth in this arena, with more than $6.5 billion in assets under management currently. The fund also trades north of 500,000 shares on an average daily basis. Other funds that fall into this sub-sector include VMBS (Vanguard Mortgage Backed Securities), CMBS (iShares Barclays CMBS Bond), MBG (SPDR Barclays Capital Mortgage Backed Bond), GNMA (iShares Barclays GNMA Bond), and COBO (ProShares USD Covered Bond).

Investors in these funds generally are drawn by the relative price stability and merits of protection of principal (for example, if one looks at a chart of MBB one will see a gradually upward sloping graph and a price range in the ETF of only $2 (approximately $106 to $108) throughout the year of 2012.

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