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Portfolio > Economy & Markets > Fixed Income

Mortgage ETF Comes to Market

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Despite a quiet 2006, the bond-based ETF category has picked up this year with the addition of another new fund to the fixed-income universe.

Barclays Global Investors (BGI) recently launched the iShares Lehman MBS Fixed-Rate Bond Fund (AMEX: MBB), expanding its lineup of fixed-income ETFs to 15.

The fund’s annual expense ratio is 0.25 percent. Like all ETFs, the portfolio aims to reflect the performance of an underlying index, which in this case is drawn from the securities issued by GNMA (Ginnie Mae), FHLMC (Freddie Mac) and FNMA (Fannie Mae). As of February 1, the index included 387 separate mortgage-backed 30-, 20-, 15-year and balloon bond issues. Constituents have a remaining maturity of at least one year and more than $250 million or more of outstanding face value. In addition, all securities included in the index must be non-convertible and must be denominated in U.S. dollars. The fund uses a representative sampling strategy in seeking to track the underlying index.

One of the advantages that bond ETFs offer over bond mutual funds is intra-day pricing, transparency and rock-bottom expense ratios.

“Many investors have recognized that iShares fixed-income funds help clear the opaqueness of fixed-income investing,” notes Lee Kranefuss, CEO of BGI’s intermediary and exchange-traded funds business. “iShares has now brought this same level of transparency to the U.S. mortgage market.”

“For the first time, investors are able to observe intra-day pricing of a basket of mortgage securities and have the flexibility to implement their market views throughout the trading day. Investors can place limit and stop-loss orders on the iShares MBS Fund that allow them to better time entry and exit into the market, and the fund can be shorted on a downtick, making it a valuable risk management tool.”

Ron DeLegge is the editor of


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