Investing in mortgage-backed securities doesn’t mean that investors have to stay locked in on one fund for years, thanks to targeted duration options like the FlexShares Disciplined Duration MBS Index Fund (MBSD).

MBSD seeks investment results that generally correspond to the price and yield performance of the ICE BofA Merrill Lynch, Constrained Duration US Mortgage-Backed Securities Index. The underlying index reflects the performance of a selection of investment-grade U.S. agency residential mortgage-backed pass-through securities.

“Many investors look to mortgage-backed securities (MBS) as an option to help diversify their fixed-income holdings and pursue higher potential yields than are available from U.S. Treasuries,” a FlexShares Fund Focus article said. “However, investing in MBS comes with special considerations around duration—a key measurement of a fixed-income security’s sensitivity to interest rate movements.”

“We believe that historically duration has been a major driver of MBS risk and returns and that investors must continually monitor the effective duration of an MBS portfolio due to the impact of mortgage prepayments,” FlexShares added.

As mentioned, the fund targets a specified duration in order to mute the effects of interest rate volatility.

“The index is composed of securities selected from the universe of 10-year, 15-year, and 30-year MBS,” the Fund Focus added. “The index seeks to maintain a monthly effective duration within a one-year band of 3.25 years to 4.25 years—with a midpoint target of 3.75 years. This range was chosen to help avoid greater turnover than potentially necessary to help maintain the target duration. The index also factors such as current Federal Reserve policy, the outlook for U.S. interest rates and potential reforms of agency mortgage programs.”

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Record Issuance by Ginnie Mae

The month of August has seen government-owned corporation Ginnie Mae issue a record volume of mortgage-backed securities. Issuance volume came in at $70.85 billion last month despite a drop in loan production.

“Although loan production is slowing, Ginnie Mae continues to see strong MBS issuance and steady investor demand, a reflection of the broad appeal and value of the Ginnie Mae MBS program, and its role in financing affordable homeownership and rental housing,” said Ginnie Mae Acting EVP Michael Drayne. “Our commitment to maintaining an innovative MBS program that produces the types of securities investors demand and that Issuers can use to help consumers purchase homes in their communities continues to drive our efforts every day.”

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