“A normalization of the Fed balance sheet would likely involve eliminating most of the central bank’s MBS holdings over time,” said BlackRock in a recent note. “MBS valuations today reflect anticipation that this process will go smoothly—as well as benign expectations that rates will rise only gradually. These expectations are not limited to MBS—credit spreads as well stand at or close to post-crisis tight levels. This leaves little margin for error, we believe, and is reflected in our neutral stance on MBS and preference for higher-quality credit in today’s environment.”

Other MBS ETFs include the Vanguard Mortgage-Backed Securities Index ETF (NYSEArca: VMBS), SPDR Barclays Mortgage Backed Bond ETF (NYSEArca: MBG), iShares CMBS ETF (NYSEArca: CMBS), iShares Core GNMA Bond ETF (NYSEArca: GNMA), FlexShares Disciplined Duration MBS Index Fund (NasdaqGM: MBSD) and First Trust Low Duration Mortgage Opportunities ETF (NasdaqGM: LMBS).

“However, this is the first time the Fed has ever used asset reductions as a tightening (or normalizing) tool, making the actual impacts uncertain. As such, the Fed is likely to proceed cautiously with its unwinding,” according to BlackRock.

For more information on Fixed-Income ETFs, visit our Fixed-Income category.