Mortgage-Backed Securities Offer Value, Strong Credit Quality

Experienced bond investors know that capturing the combination of good value and strong credit quality under one umbrella isn’t an easy task. That is to say, high credit quality and lower default risks often sport elevated costs of admission. However, this isn’t an impossible task, and some market observers believe that mortgage-backed securities (MBS) make accomplishing the goal easier. That asset class is accessible via select exchange traded funds, including the SPDR Portfolio Mortgage-Backed Bond ETF (SPMB).

The $4.06 billion SPMB follows the Bloomberg U.S. MBS Index, providing investors with exposure to MBS issued by government-sponsored entities such as Government National Mortgage Association (“GNMA”); Federal National Mortgage Association (“FNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”), according to the ETF’s sponsor.

An ETF such as SPMB is all the more relevant today because MBS are offering more value than investment-grade corporate debt with lower default risk.

“Persistent high inflation and high interest rates have created headwinds for corporate profit margins and strained company balance sheets. The probability of a US recession in the next 12 months has jumped to 57%, based on the New York Fed yield curve model,” noted Anqi Dong of State Street Global Advisors (SSGA). “However, IG bonds’ tight credit spreads are not reflecting the negative credit outlook and recessionary risk. Decade-high yields and wide spreads on mortgage-backed securities have created an attractive entry point for investors.”

SPMB, which turned 14 years old in January, holds 2,116 mortgage bonds with an option-adjusted duration of 6.12 years. That puts the ETF in intermediate-term territory — the duration segment with the lowest correlation to equities. This could be a sign that SPMB could function as a solid portfolio diversifier. The average maturity of the ETF’s holdings is 8.28 years, according to SSGA data.

For advisors or institutional investors that need to transact in large amounts of SPMB, the good news is that the ETF is highly liquid. For cost-conscious investors, the good news is that the fund sports a tiny expense ratio.

“With a net expense ratio of just 4 basis points — one of the lowest in the US-listed MBS-focused ETF space — the SPDR® Portfolio Mortgage Backed Bond ETF (SPMB) seeks to provide exposure to the multi-trillion-dollar MBS market in a cost-efficient way. And it has traded at a penny-wide spread every day for the past year amid elevated bond market volatility,” concluded SSGA’s Dong.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.