Schwab Asset Management has introduced the Schwab Mortgage-Backed Securities ETF (SMBS US), offering cost-effective access to investment-grade mortgage-backed securities (MBS) guaranteed by US government agencies.
Schwab Asset Management is a leader in low-cost core portfolio ETFs.
The ETF, listed on NYSE Arca with an industry-leading expense ratio of just 0.03%, provides a compelling option for fixed income investors seeking high-quality core portfolio exposure.
MBS are debt securities backed by cash flows from pools of residential mortgage loans. These loans are originated by banks and other lenders and then securitized by government or quasi-government entities such as Ginnie Mae, Fannie Mae, and Freddie Mac.
Ginnie Mae guarantees timely payments and is backed by the full faith and credit of the US government, while Fannie Mae and Freddie Mac provide credit guarantees and have access to US Treasury funding, though they lack full government backing.
Investing in MBS offers distinct advantages, including regular income through interest and principal payments, high credit quality due to government backing, and portfolio diversification with low correlation to equities.
Schwab highlights the current attractiveness of bond yields, noting that the average yield spread of MBS over US Treasuries has risen to 80 basis points, as of 30 September, compared to a 15-year average of 55 basis points.
SMBS tracks the Bloomberg US MBS Float Adjusted Total Return Index, which includes pass-through securities guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac. The index focuses on securities with at least $1 billion in outstanding principal and a weighted average maturity of at least one year. It excludes complex instruments like TBAs, collateralized mortgage obligations (CMOs), and adjustable-rate mortgages.
As of 30 September, the index yielded 4.31% and had an effective duration of 5.36 years.
The ETF’s ultra-low expense ratio positions it as a strong competitor to established passive MBS ETFs, including the $33bn iShares MBS ETF (MBB US), $19bn Vanguard Mortgage-Backed Securities ETF (VMBS US), and $6bn SPDR Portfolio Mortgage Backed Bond ETF (SPMB US), all of which have slightly higher expense ratios of 0.04%.
Nicohl Bogan, Head of Passive Product Management & Innovation at Schwab Asset Management, stated: “This is an exciting time for the fixed income market, and Schwab is committed to providing competitively priced solutions for investors. The launch of SMBS demonstrates our dedication to leveraging scale and expertise to deliver core market exposures for well-diversified portfolios.”