The WisdomTree Mortgage Plus Bond Fund (NYSEArca: MTGP) debuted last week as a new, active approach to mortgage-backed securities (MBS), an asset class typically dominated by prosaic approaches in the world of ETFs.
MBS are created when an entity acquires a bundle of mortgages and then sells the securities. Most MBS are seen as “pass-through” security where the principal and interest payments are passed through the issuer to the investor.
MTGP is an actively managed ETF primarily investing in agency residential and commercial mortgage-backed securities while having the flexibility to diversify into other sectors of the securitized debt market. The fund is sub-advised by Voya Investment Management Co., LLC (Voya IM), a well-respected investment manager in securitized debt managing over $31 billion.
“Securitized debt sectors provided incremental yield relative to U.S. Treasuries with similar durations and significantly lower durations than broad-based exposures to corporate bonds,” said WisdomTree in a recent note. “Access to securitized debt sectors provides an investment option which may increase yield relative to U.S. Treasuries without increasing portfolio duration. Lower durations are a good indicator of less price sensitivity to movements in interest rates.”
While MBS may offer modestly higher yields relative to U.S. Treasuries, the mortgage-backed bonds are exposed to prepayment risk – if rates dip before the security’s maturity, a homeowner can refinance debt, causing an investor to get back the principal early and reinvest it in a security with a lower yield.
Many securitized debt sectors remain much earlier in their respective credit cycle than many corporate credit markets and thus do not currently face headwinds of the magnitude typically associated with a late-cycle market. While there exists a correlation between markets, the lack of substantial growth in mortgage securities relative to corporate debt may potentially provide a supportive credit environment for investors and generally attractive valuations.
“Most of the securitized debt universe is closely tied to the health of the Consumer and the Housing Market , which often follows a different path than Corporate America,” said WisdomTree. “This distinction hints at the diversification potential offered by securitized debt relative to both corporate bonds and equities. Mortgage-backed securities and other securitized debt has historically exhibited low correlations to other fixed income spread sectors, such as corporates, and equities.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.