Simplify Asset Management has launched its latest exchange-traded fund, the Simplify MBS ETF (NYSE Arca: MTBA). MTBA invests in mortgage-backed securities. They provide attractive yields versus comparable U.S. Treasuries. And they do this while carrying little to no credit risk.
Unlike the mortgage-backed securities that make up the benchmark Bloomberg U.S. MBS Index and populate the holdings of the large, legacy MBS-focused ETFs, MTBA will focus on providing exposure to newer mortgage-backed securities issued in 2023.
A Potential Cushion Against Losses
MTBA will initially invest in the Federal National Mortgage Association (Fannie Mae) 6.0% coupon bonds. The fund will obtain this exposure via investments in to-be-announced (TBA) contracts, which are mortgage-backed securities forward contracts. These TBA contracts provide improved liquidity versus buying mortgage-backed securities directly. They also have greater operational and tax simplicity, and will be rolled monthly as they approach expiration.
“MBS issued this year have larger coupons and shorter durations in comparison to previous vintages,” said Simplify Managing Partner Harley Bassman. This provides “a potential cushion against losses if the Federal Reserve keeps rates ‘higher for longer.’”
Bassman, who created the strategy underpinning MTBA, added: “Approaches that only mimic the broad MBS universe are bound to disappoint.” That’s because “more than 70% of all 30-year MBS have coupons between 2% and 3.5% with an average price near 79.” This means that “investors are left with small distributions, large durations, and poor positioning in the event of a hard landing.”
Simplify expects MTBA to deliver a monthly distribution and will do so with no lockups or K-1 tax forms.
The Role of MBS in a Fixed Income Portfolio
“Investors understand the theoretical role MBS exposure should play in a diversified fixed income portfolio,” added Bassman. Namely, that is to provide “attractive yields versus comparable U.S. Treasuries while carrying little to no credit risk.”
“Yet to this point, broad MBS solutions have been found wanting,” he noted. “Rather than go broad, now is the time for investors to consider the exposure offered by MTBA.”