Fixed income investors looking to safely diversify their portfolios beyond safe haven Treasury notes can opt for the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS).
“Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property,” an Investor.gov article explained. “Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization.”
VMBS seeks to track the performance of a market-weighted mortgage-backed securities index. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. MBS Float Adjusted Index., which covers U.S. agency mortgage-backed pass-through securities.
To be included in the index, pool aggregates must have at least $250 million currently outstanding and a weighted average maturity of at least one year. All of the fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
VMBS:
- Seeks to provide a moderate and sustainable level of current income.
- Invests primarily in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
- Moderate interest rate risk, with a dollar-weighted average maturity of 3 to 10 years.
Backed by the Government
One of the primary features of VMBS is exposure to debt that’s backed by government agencies. With this guarantee, investors have peace of mind knowing that their capital is subjected to less risk.
“Most mortgage-backed securities are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises,” the Investor.gov article said. “Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury.”
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