iShares launches first MBS bond ETF in Europe

May 27th, 2016 | By | Category: Fixed Income

Global exchange-traded fund provider iShares has launched Europe’s first ETF investing in high quality US mortgage-backed securities. The iShares US Mortgage Backed Securities UCITS ETF (IMBS LN) provides access to AAA-rated mortgage-backed securities issued by three agencies (Ginnie Mae, Fannie Mae and Freddie Mac) backed by the US government.

iShares launches first MBS bond ETF in Europe

The iShares US Mortgage Backed Securities UCITS ETF (IMBS LN) provides access to AAA-rated mortgage-backed securities issued by three agencies (Ginnie Mae, Fannie Mae and Freddie Mac) backed by the US government.

The fund is listed with a GBP-denominated share class under the ticker SMBS and is due to be rolled out on the Deutsche Boerse in euros. It has a total expense ratio of 0.28%.

The fund tracks the Barclays US MBS Index which is based on a universe of individual fixed rate pools, providing some diversification across factors such as interest rate sensitivity and prepayment risk. However, investors should be aware that mortgage backed securities do contain unique characteristics compared to other bond instruments. 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.

A mortgage-backed security is made up of pools of mortgages that are combined or ‘securitised’ into a liquid and tradeable bond. The US agency-backed market is the most liquid part of the securitised bond market, and the second most liquid US bond market after Treasuries. These securities account for around 11% of the $49tn global fixed income market.

As of 24 May 2016 the ETF has a weighted average yield-to-maturity of 2.17% and an effective duration of 2.76 years.

Brett Olson, Head of iShares EMEA Fixed income, said in a statement: “This is a part of the bond market that European UCITS investors previously haven’t had access to through an ETF. This is the latest addition to our industry-leading range of UCITS bond ETFs, and represents yet another tool that investors can use to diversify their bond exposures in a liquid and transparent way.

“Mortgage-backed securities have the potential to offer higher yields than bonds of similarly high credit quality. This fund could be an option for investors looking to gain exposure to the US housing market in addition to corporate balance sheets.”

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