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With their attractive yields in the current market environment, bond funds of various varieties have been seeing increased demand. But to diversify a fixed income portfolio, investors may want to add mortgage-backed securities (MBS).
Residential and commercial real estate have their own respective headwinds amid a high-interest rate environment. Still, for fixed income investors wanting to diversify their income before rate cuts happen, mortgage-backed securities (MBS) still remain an option.
The Vanguard Mortgage-Backed Securities Index Fund ETF Shares is a potential beneficiary of the current cycle shift in the market. The VMBS ETF invests in U.S. agency mortgage-backed pass-through securities and offers a cost-effective platform with a low expense ratio. The VMBS fund provides steady income, low credit risk, and diversification benefits, but is susceptible to interest rate and refinancing risks.
The Vanguard Mortgage-Backed Securities ETF has experienced losses due to rising interest rates and bond yields. The FolioBeyond Alternative Income and Interest Rate Hedge ETF may provide a hedge against rising interest rate exposure. A 40/60 portfolio of VMBS/RISR could potentially generate a mid single-digit yield and high single-digit total returns.
The Vanguard Mortgage-Backed Securities Index Fund ETF offers a diversified portfolio of Agency MBS bonds. The Agency MBS asset class is attractive due to the historic wide spreads on Agency MBS bonds versus Treasuries, particularly on the long side of the curve. The Vanguard Mortgage-Backed Securities Index Fund ETF experienced a deep drawdown in 2022 due to higher rates, but is expected to outperform going forward.
FAQ
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