Barclays Global Investors listed iShares Lehman MBS Fixed-Rate Bond Fund , the first exchange-traded fund providing exposure to the market for mortgage-backed securities, on the American Stock Exchange. The ETF has an expense ratio of 0.25%, according to a statement. The Lehman tracking index measures the performance of investment grade fixed-rate mortgage-backed pass-through securities of Ginnie Mae, Freddie Mac and Fannie Mae.
This mortgage ETF from Barclays was launched a while ago amid concerns that the sub-prime mortgage market was in disarray.
In addition, “mortgage-backed securities have higher yields to compensate investors for so-called prepayment risk. When interest rates decline, home owners often pay off their loans early, refinance their mortgages or buy a bigger house, so holders of mortgage-backed securities have some uncertainty about the timing and amount of their payments.”
It’s important to note that this ETF does NOT hold the riskier sub-prime loans that are indicative of lower-income home buyers with generally weak credit scores. Rather, this ETF tracks an index of investment grade, fixed-rate mortgage backed securities of government sponsored mortgage issuers Ginnie Mae, Freddie Mac, and Fannie Mae. The index includes 30-, 20-, 15-year and “balloon” securities that have a remaining maturity of at least one year and have more than $250 million of outstanding face value.
Over 99% of the holdings are rated AAA by both Moody’s and Standard & Poor.The expense ratio is 0.25% which is relatively low for this type of fund.