As the stock market tanked this week, we saw a pickup in the flight to fixed income, a microcosm of the same mass migration that has happened throughout 2019.
One of the biggest beneficiaries of this asset shift is the $19 billion iShares MBS ETF (MBB), which has consistently been among our top flows-gathering ETFs week after week. This week was no exception: The mortgage-backed security (MBS) ETF brought in $540 million in new net inflows, the eighth highest of any ETF on the market.
Year to date, MBB has brought in $5.8 billion in new net investment assets.
All The Yield, But Lower Risk
MBB’s surge is a story of yield and risk. MBS, which are repackaged bundles of mortgages that generate income for investors as borrowers make their loan payments, provide better yields than Treasuries over the same durations, while avoiding any of the credit risk of corporate bonds.
Currently, MBB offers a 2.75% yield-to-maturity, much higher than that of the $2 billion iShares Intermediate Government/Credit Bond ETF (GVI), which tracks a broad basket of Treasuries, agency and investment-grade corporates with roughly the same duration as MBB; or the $13 billion iShares U.S. Treasury Bond ETF (GOVT), which tracks a broad maturity Treasuries portfolio with a much higher duration than MBB.
GVI’s yield-to-maturity is only 2.14%, while GOVT’s is 1.94%.
Furthermore, MBS also possess low correlations to risk assets, like equities. In fact, their correlations are among the lowest for any fixed income instrument, making them an attractive safe haven when the stock market grows turbulent—which has been the case off and on since last December.
Plus, unlike corporates, there’s no built-in exposure to the stock market or to how any given company performs day to day. MBS are influenced by mortgage interest rates, even housing starts.
Liquidity Matters
Finally, MBS are highly liquid. That’s an important prerequisite for institutional bond investors, who need to be able to enter and exit a trade at will. The ETF wrapper makes investment at scale even easier; instead of purchasing a slew of individual bond issues, institutions can purchase a single ETF and get all the diversified MBS exposure they require.
At the ETF level, MBB is the undisputed queen of liquidity. As the first-to-market fund, MBB is almost twice the size of its next nearest competitor, the $10 billion Vanguard Mortgage-Backed Securities ETF (VMBS). It also trades with twice the volume ($100 million compared to VMBS’ $51 million) and half the average spread (0.01% to 0.02%).
That’s not to say VMBS is illiquid—it isn’t, not by a long shot—but there’s a reason bulk traders prefer MBB. At scale, every basis point can make a difference. That’s probably why, over the past month, we’ve seen VMBS bring in only $153 million.
MBB and VMBS carry the same expense ratio: 0.07%.
Contact Lara Crigger at [email protected]
