The Bond ETF Most Investors Overlook -- and Why It Belongs in Your Portfolio Right Now
Yahoo Finance ·
Bonds play an important role in helping investors diversify their portfolios. One of the easiest ways to add bonds to your portfolio is through an exchange-traded fund (ETF). Most investors likely invest in bond ETFs focused on U.S. treasuries or investment-grade corporate bonds. There's nothing wrong with that as they're high-quality fixed-income investments. However, it causes many investors to overlook the combination of quality and yield offered by mortgage-backed securities (MBS). One of the best ways to invest in these bonds is the Vanguard Mortgage-Backed Securities ETF ( VMBS +0.04% ) . Here's why it belongs in your portfolio right now. MBS are collections of mortgages bundled by a bank or financial institution and sold to government-sponsored agencies (GSAs: Ginnie Mae, Fannie Mae, and Freddie Mac). The GSAs guarantee these loans against credit losses and sell them to investors, including mortgage REITs and ETFs. That gives Agency MBS a risk profile similar to that of U.S. Treasuries. Because the U.S. government backs these bonds, they carry near-zero default risk, as it can raise taxes or print money to satisfy its debt obligations. However, while MBS have a similar risk profile to treasuries, they typically yield higher, often closer to investment-grade corporate bonds. While investment-grade corporate bonds also have low default risk, they're still riskier than treasuries.
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