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Summary Federally Backed Mortgage Backed Securities Offer Comparably Attractive Returns. VMBS Has Low Fees And Holds High Quality Bonds. VMBS Is An Affordable Option For Investing In The Mortgage Securities Market. Introduction Balance is an essential aspect of investing. In the spirit of diversification, I’ve spent a measurable amount of time imploring investors to weigh the benefits of alternative investments. I’ve harped on about ETNs, inverse treasury hedging tools, and ETFs. In this article I hope to analyze the benefits of one particular ETF, the Vanguard Mortgage-Backed Securities Index ETF (NASDAQ: VMBS ). There are eight widely recognized mortgage backed securities ETFs, but there are 3 that I consider to be “investable.” They include the iShares MBS ETF (NYSEARCA: MBB ), the iShares CMBS ETF (NYSEARCA: CMBS ), and VMBS . Federal issued mortgage securities offer safe long term fixed income returns. Typically, the barrier to entry to buy an individual MBS is around $25,000. For this reason an ETF may be a more realistic option for the average investor. Now let’s take a closer look at what makes VMBS an attractive buy. Why Mortgaged Backed Securities Mortgage backed securities are safe investments that offer an optimal source of fixed income. VMBS tracks the performance of the Barclays Capital U.S. MBS index. VMBS is extremely safe because it only holds bonds issued by Ginnie Mae, Fannie Mae ( OTCQB:FNMA ), and Freddie Mac ( OTCQB:FMCC ). Fannie Mae and Freddie Mac are publicly traded companies that offer agency guarantees with the backing of the U.S. government, and Ginnie Mae mortgage securities are backed by the full faith and credit of the U.S. government. Mortgaged backed securities offer returns in excess of 1-2% above U.S. Treasuries. However, MBS do not have the same tax advantages as Treasuries (which should be individually factored into the net return). Investors looking for a safe and highly performing alternative to Treasuries should consider investing in mortgage backed securities. VMBS Analysis VMBS is a strong MBS ETF with solid underlying assets, optimal yields, and a low expense ratio. VMBS’s competitors hold a mere 48.81% in AAA rated bonds. Conversely, VMBS’s bond portfolio is 100% AAA rated bonds. The bonds that VMBS holds have an average effective duration of 3.24 years and an average effective maturity of 5.60 years. The average weighted coupon is 3.85%. Currently VMBS is priced at 106.45. VMBS is the second largest MBS ETF with over 1.45 Billion in total assets. VMBS’s total assets are second only to MBB. MBB however holds marginally lower quality bonds, and MBB has a higher expense ratio. Below VMBS is CMBS which holds 179 million in total assets. VMBS has one of the lowest expense ratios at 0.12% (which prevents cash flows getting siphoned off to cover fees). VMBS’s net SEC yield is attractive at 1.43%, and VMBS is extremely liquid as well with an average volume of 206,475. Forward Strategy A high quality fund with strong assets such as VMBS will perform optimally over its competitors in a rising interest rate environment. Janet Yellen just promised rates would rise later this year, so it is important to consider the consequences interest rates will have. I think an MBS ETF is a strong addition to a well balanced portfolio. I should note, however, that bond prices are inversely correlated to rising rates, so it is possible to see some marginal capital depreciation. On the other hand, this would likely mean VMBS’s SEC yield would increase. AAA rated bonds are less risky, and therefore maintain their value in a variety of changing environments. For this reason, I believe VMBS will perform optimally in years to come. Conclusion Consider a safe source of income that outperforms Treasuries. There are capital barriers to entry in the primary and secondary mortgage backed securities market. However, VMBS is an attractive and affordable ETF that provides broad based coverage to any investor. VMBS has strong holdings, and it is a conservative investment that won’t disappoint. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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