Investors can gain exposure to a diverse pool of mortgage-backed securities through exchange traded funds, but investors should first understand how the investments work.

To start off, investors should know what they are getting themselves into. MBS are created when an entity acquires a bundle of mortgages and then sells the securities. Most MBS are seen as a “pass-through” security where the principal and interest payments are passed through the issuer to the investor.

One of the more notable entrants in the field of mortgage-backed securities ETFs is the Vanguard Mortgage-Backed Securities Index ETF (NYSEArca: VMBS).

“This fund delivers a higher yield than most of its peers that invest in agency MBS because of its relatively larger investments in Fannie Mae- and Freddie Mac-issued mortgage bonds” said Morningstar in a recent note. “Unlike Treasury bonds, these bonds are not explicitly guaranteed by the U.S. government, and they offer higher yields than Treasuries with a comparable term. The fund’s investments in Fannie Mae- and Freddie Mac securities represented roughly 70% of the portfolio as of March 2017.”

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