BMO Global Asset Management has launched a new fixed income ETF that is the first to provide targeted exposure to Canadian mortgage-backed securities.

Mark Raes, Head of Product, BMO Global Asset Management.

The BMO Canadian MBS Index ETF (ZMBS CN) has listed on the Toronto Stock Exchange and comes with a management fee of 0.15%.

The fund is aimed at investors seeking defensive income with distributions made on a monthly basis.

A mortgage-backed security is made up of pools of mortgages that are combined or ‘securitized’ into a liquid and tradeable bond.

Mortgage-backed securities contain unique characteristics compared to other bonds. In particular, they tend to exhibit negative convexity due to their prepayment features. This causes their price to increase at a slower rate when interest rates fall and to decrease at a slower rate when interest rates rise compared to other fixed income instruments.

By targeting the entire Canadian MBS market, however, the ETF offers some diversification across factors such as interest rate sensitivity and prepayment risk.

The fund tracks the FTSE Canada NHA MBS 975 Index which consists of mortgage-backed securities that are denominated in Canadian dollars and insured by the Canada Mortgage and Housing Corporation.

Eligible securities must have a minimum issue size of $200 million, at least $100m outstanding, and a time to maturity greater than one year.

Constituents are weighted by market capitalization and rebalanced monthly.

Mark Raes, Head of Product, BMO Global Asset Management. “We have launched Canada’s first MBS ETF which provides unique exposure to a segment of the MBS market fully guaranteed by the Canada Mortgage and Housing Corporation.

“This listing further demonstrates our commitment to the bond market where ETFs bring added liquidity and trading efficiency for fixed income positioning.”