For investors looking for fixed income diversification, mortgage-backed securities (MBS) could offer a happy home. Specifically, they should look into broad-based exposure via the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS).
MBS could also be a viable alternative to those considering corporate bonds. A Bloomberg article recently noted that a heavy influx of corporate bonds to fuel artificial intelligence (AI) ambitions could be tenuous. Frothy valuations in tech companies spending heavily on AI could spill over into their associated bonds, making them risky propositions.
Compared to corporate bonds, VMBS tilts toward higher-quality credit. The fund focuses on MBS assets guaranteed by quasi-governmental institutions like Ginnie Mae as well as government-sponsored enterprises like Fannie Mae and Freddie Mac. This should give risk averse fixed income investors some peace of mind.
Additionally, MBS can help fill the income void as yields from safer haven debt like Treasuries begin to subside. As of December 1, the fund’s 30-day SEC yield is 4.07%. The fund tilts towards intermediate exposure to strike a balance between attaining yield and mitigating rate risk.
With over 1,400 bonds as of October 31, VMBS offers heavy diversification. For those looking for MBS exposure, the fund also offers a cost-effective option with its 0.03% expense ratio ($3 per $10,000 invested).
Money managers including Columbia Threadneedle are looking closely at US mortgage backed securities as a place to hide from high valuations in US corporate bonds and a wave of tech bond sales that could weigh on returns. https://t.co/cTI6GbGDC2
— Bloomberg (@business) December 1, 2025
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2026 Housing Outlook
The housing outlook will also weigh in on demand for MBS products in 2026. Much of that, of course, hinges upon the interest rate landscape as more cuts are expected to happen in the new year. Incoming economic data will ultimately determine the pace and aggressiveness of the Fed with regard to their cuts.
The hope is that 2026 will paint a rosier picture of the housing market after challenges persisted in 2025. As the Fed institutes more cuts, falling mortgage rates should help stoke demand, which in turn, could turn up the wick on demand for MBS.
“After a challenging period for buyers, sellers, and renters, 2026 should offer a welcome, if modest, step toward a healthier housing market,” said Realtor.com Chief Economist Danielle Hale. “Incomes climbing faster than inflation as mortgage rates steady at a lower level create space for affordability to improve.”
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