It’s getting cheaper to invest in fixed income exchange traded funds thanks to State Street Global Advisors (SSGA).
With “expense ratio reductions, SPMB and SPHY are the lowest cost mortgage-backed and high yield bond ETF offerings, respectively,” according to a statement from the issuer.
The new fee on SPMB is 0.04% per year, or $4 on a $10,000 investment, down from 0.06%, while the new expense ratio on SPHY is 0.10%. That junk bond ETF previously charged 0.15% per year.
MBS are created when an entity acquires a bundle of mortgages and then sells the securities. Most MBS assets are seen as “pass-through” security where the principal and interest payments are passed through the issuer to the investor.
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.
Most funds typically trade securities taken from the three prominent agencies – Ginnie Mae, Fannie Mae, and Freddie Mac. These agency securities usually come with high-quality ratings and are explicitly or somewhat implicitly backed by the U.S. government. As such, credit risk is minimal with SPMB.
There are some particularly specific risks associated with the asset class. For instance, borrowers can prepay mortgages, which poses a large risk in a falling rate environment since borrowers would typically refinance their mortgages at cheaper rates. Consequently, mortgage-backed securities investors would get their principal back before maturity and have to reinvest at the lower rates.
SPMB follows the Bloomberg Barclays U.S. MBS Index.
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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.