MBS Enthusiasm Could Lift This ETF | ETF Trends

Following an avalanche of interest rate hikes by the Federal Reserve spanning 2022 and 2023, an array of high-quality bond classes sport tempting yields. That includes various forms of U.S. government debt. Not to be lost in that conversation are mortgage-backed securities (MBS).

Exchange traded funds, including the WisdomTree Mortgage Plus Bond Fund (MTGP), provide fixed income investors with efficient access to MBS, and there’s more to the story. The fund, which turns five years old in November, offers investors a solid 3.36% 30-day SEC yield with the benefit of minimal credit risk.

Add to that, there are signs professional investors are increasingly warming to MBS, citing the very attributes offered by the WisdomTree ETF: compelling yields and stout credit quality. The actively managed MTGP holds nearly 150 issues of government-sponsored entities (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae.

MBS ETF MTGP Could Have Momentum

As is the case with corporate and municipal debt, the ability of mortgage holders to service their obligations is integral to the MBS investment thesis. Fortunately for investors considering this asset class and ETFs such as MTGP, payment fundamentals are sound.

“Meanwhile, fewer people will have trouble paying their mortgages thanks to low unemployment and homeowners who are enjoying an increase in home values, which has boosted the equity in their homes, said Michael Kessler, senior portfolio manager at Albion Financial Group,” reported Michelle Fox for CNBC.

Further diminishing MBS default risk is the point that, across the U.S., the bulk of homeowners are above water on their mortgages, meaning their homes are worth more than the debt owed to the mortgage lender.

Another source of allure with MTGP is that there’s arguably a valuation case for MBS today. That’s because the Federal Reserve and some banks have stopped buying these securities. That’s not a fundamental commentary. For the Fed, it’s trying to decrease its balance sheet, and many banks are trying to keep more capital on hand in the event of a recession. Current spreads between MBS, including MTGP holdings, over other fixed income segments, could be indicative of opportunity with the ETF.

Pramod Atluri, fixed income portfolio manager at Capital Group, told CNBC “agency MBS are more attractive than investment-grade corporate right now. As interest-rate volatility comes down and the curve normalizes, agency MBS can see 100 or 200 basis points of excess returns.”

MTGP’s effective duration is 6.04 years and its annual fee is 0.45%, or $45 on a $10,000 stake.

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