FlexShares, the exchange traded funds unit of Northern Trust (NasdaqGS: NTRS), today introduced the FlexShares Disciplined Duration MBS Index Fund (NasdaqGM: MBSD).
The new ETF consists of mortgage-backed securities issued by the Federal National Mortgage Association (FNMA or Fannie Mae), the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) or the Government National Mortgage Association (GNMA or Ginnie Mae).
MBSD “targets an average effective duration of 3.75 years, with an admissible range between 3.25 and 4.25 years,” according to a statement issued by FlexShares.
MBSD will compete with the likes of the iShares MBS ETF (NYSEArca: MBB) and the Vanguard Mortgage-Backed Securities Index ETF (NasdaqGM: VMBS). However, the new FlexShares fund offers some different features for income investors that have warmed to MBS funds due to excellent credit quality and yield. [Investors Warm to MBS ETFs]
“Legacy MBS products typically track market-weighted MBS indexes having duration extension and contraction risks that require frequent monitoring and adjustment by the investor,” according to FlexShares.
However, MBSD attempts to temper duration and contraction risk that can be caused by mortgage prepayments, among other factors.
MBS ETFs were solid performers for some time, aided by the Federal Reserve’s quantitative easing program that, at its height, saw the central bank gobble up around 50% of monthly gross issuances of mortgage debt. MBS funds did, however, prove vulnerable last year when talk of QE tapering escalated. [Taper Talk Pressures MBS ETFs]
MBS ETFs have solid this year as 10-year Treasury yields have plunged and investors have adjusted to the Fed’s QE reductions.
“With our ongoing focus on real-world investor needs, we developed this Fund as an income generation tool that offers investors the unique characteristics of the mortgage-backed securities (MBS) sector,” said Shundrawn A. Thomas, executive vice president and head of Northern Trusts’ Funds and Managed Accounts Group, in the statement. “The FlexShares Disciplined Duration MBS Index Fund is designed to help investors generate income and diversify their fixed income exposure while dampening the volatility that can result from duration risk.”
MBSD charges 0.2% per year.
ETF Trends editorial team contributed to this post.