Kapito, though, argued that rising interest rates could push more investors back into the asset class after years of depressed rates caused many to favor higher-yielding equities. For example, he highlighted ETFs like the iShares MBS ETF (NasdaqGM: MBB) as a good way to focus on mortgage-based products because ETFs mitigate tax, liquidity, and transparency issues.
“If you own mortgages for your clients, and many do, they’re very complicated. You get monthly cash flows. You get prepayments when you don’t want them. They’re zip code- and pool-specific. It’s a nightmare,” Kapito said.
“I can create mortgage products in an ETF, give you one product, trades on the stock exchange, you get one dividend. It’s just a much cleaner way to express it and it’s at a lower fee than what a bid-offer spread would be. Once that starts to get out into the market, that we could do that, I think this is going to be very, very large opportunity for us.”
For more information on the fixed-income space, visit our bond ETFs category.