The Big New Names in Mortgage-Backed Securities ETFs

The Mortgage-Backed Securities (MBS) ETF market is experiencing a significant surge, evidenced by major new fund launches and mutual fund conversions attracting substantial assets at inception, such as Eaton Vance's EVMO ($600M), Schwab's SMBS ($5.2B), and JPMorgan's JMTG ($3.7B). This robust growth is attributed to MBS's compelling valuations relative to corporate bonds, year-to-date outperformance against Treasuries (S&P U.S. MBS Index up nearly 5%), tighter supply, and wide spreads that offer attractive risk compensation. Furthermore, agency MBS provides diversification and potential defensive benefits in a slowing economic environment, making the asset class increasingly attractive to institutional investors.

Analysis

The Mortgage-Backed Securities (MBS) ETF market is experiencing a significant expansion, characterized by the successful launch of several large-scale funds from major asset managers like Eaton Vance, Schwab, and J.P. Morgan. These new entrants, including the Schwab Mortgage-Backed Securities ETF (SMBS) and the JPMorgan Mortgage-Backed Securities ETF (JMTG), have rapidly accumulated substantial assets, reaching $5.2 billion and $3.7 billion respectively, often through conversions of existing mutual funds. This influx is driven by a confluence of favorable market conditions. The asset class is demonstrating strong relative value, with compelling valuations compared to corporate bonds and spreads that remain wide relative to historical averages, thereby offering ample compensation for risk. Performance has been robust, with the S&P U.S. Mortgage-Backed Securities Index delivering a total return of nearly 5% year-to-date, outpacing Treasuries. The technical backdrop is further supported by a dynamic of lower issuance creating tighter supply against growing demand from institutional investors. Furthermore, agency MBS is being positioned as a key portfolio diversifier, particularly for investors with high exposure to U.S. corporate credit, and as a defensive asset that could benefit from a potential economic slowdown and broader market volatility.

Key Decisions for Investors

• Investors with significant corporate credit exposure should consider allocating to agency MBS ETFs such as SMBS or MBB for diversification, as their risk and return drivers are distinct from corporate debt.
• For those seeking income and total return in the current fixed-income environment, the attractive valuations and wide spreads in the MBS sector present a compelling alternative to traditional government and corporate bonds.
• Given the potential for government-backed agency MBS to perform well in a slowing economy, investors anticipating macroeconomic volatility may find it prudent to increase their weighting in this asset class as a defensive measure.
• Evaluate both large, passive ETFs like MBB and VMBS for liquidity and market access, as well as newer, actively managed funds like EVMO, JMTG, and DMBS, which offer specialized expertise in navigating the securitized products market.