Currently, the refinancing rate is closer to its 10-year trailing average, and refinancing risk seems minimal since most who can refinance at lower rates have already done so.
On the other hand, in a rising rate environment, mortgage-backed securities have so-called extension risk where capital is invested at low rates for an extended period where there is a high likelihood of rising rates down the line, which make existing securities less attractive than newer issues. [ETFs for a Changing Bond Market]
Alternatively, the iShares MBS ETF (NYSEArca: MBB) is the largest MBS ETF on the market. The iShares options is similar to VMBS, except MBB includes mortgage securities from the Federal Reserve. VMBS is also cheaper with a 0.12% expense ratio, comapred to MBB’s 0.27% expense ratio. MBB has a 4.33 year effective duration and a 1.62% 30-day SEC yield.
Additionally, the SPDR Barclays Mortgage Backed Bond ETF (NYSEArca: MBG) tracks a similar index of mortgage securities and comes with a 0.29% expense ratio, 4.52 year duration and a 2.24% 30-day SEC yield.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.