John Hancock Mortgage-Backed Securities ETF Q4 2025 Commentary

John Hancock Mortgage-Backed Securities ETF underperformed its benchmark, the Bloomberg U.S. MBS Index; yield curve positioning contributed positively while sector allocation and individual security selection detracted. Managers state they continue to see favorable valuations and attractive total-return prospects in the MBS market.

Analysis

The immediate second-order winners from a relative underperformance in agency MBS are balance-sheet lenders and mortgage originators that can lock in higher coupons while the market rerates convexity risk; they collect wider purchase spreads and can originate loans to sell into TBA with positive carry. Conversely, long-duration, convexity-sensitive holders (mortgage REITs, life insurers with limited hedges) are the vulnerable cohort if rates inflect lower and trigger a prepayment surprise — a 100bp rally in rates can flip to a 30–80% change in CPR assumptions and meaningfully reduce expected life.

Key catalyst windows are front-loaded: days–weeks around Fed speak and CPI prints will move swap spreads and TBA basis; months for seasonal refi windows and coupon reset schedules will determine realized prepayment speeds and net supply; 6–12 months for larger structural supply shifts as originators adjust production. Tail risks include a sharp, Powell-driven pivot that compresses convexity premia (rapidly rewarding long-MBS holders) or a repeat of dealer inventory squeezes if GSIB capital rules shift, which could widen dealer-implied financing and push MBS spreads wider by 20–50bps.

The consensus that MBS valuations look favorable underprices the optionality of funding flows: a modest move lower in rates can generate outsized prepayment-driven total return disappointment even while spreads tighten, and dealer balance-sheet mechanics can exacerbate moves on low-liquidity days. That creates a tactical window to harvest carry while hedging convexity — favor carry-rich, lower-coupon agency paper and short duration via Treasuries/swaps to neutralize rate-path risk, but size these trades with explicit stop-losses tied to prepayment model regime shifts.

Key Decisions for Investors

• Long MBB (iShares MBS ETF) vs short TLT (iShares 20+ Yr Treasury) — 1:1 DV01 hedge, target 3–5% total return over 3–6 months if MBS spread tightens 25–50bps; stop-loss: if 10yr yield rallies >75bps from entry (realized loss scenario ~4–6%).
• Buy VMBS (Vanguard MBS ETF) overweight the 3–7 year slice for lower duration and less convexity risk — hold 3–9 months to collect carry and roll-down, target 2–4% excess return; reduce size if primary coupon TBA bid/ask basis widens >15bps.
• Relative-value pair: long 30y FNMA/GINNIE 3.5–4.0 coupons (via TBA or ETF exposure) and pay fixed in a 2s10s steepener (receive 10s, pay 2s) — aims to capture spread compression and curve steepening over 1–4 months; risk: front-end dovish surprises compress steepener P/L, cap position so max drawdown = 2% portfolio tilt.
• Options hedge: buy receiver swaptions (2yr) to protect against a rapid rate cut that would spike prepayments — small cost (<0.5% portfolio) to cap convexity losses in a 3–9 month window.