Investors Pour Cash Into Mortgage ETFs

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(Bloomberg) — Investors on the hunt for both safety and a touch of yield have made a product stuffed with mortgage-backed securities the third-most popular exchange-traded fund this year.

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The $15 billion iShares MBS ETF, or MBB, has taken in more than $3 billion this year, according to data compiled by Bloomberg. Buyers have added about $1.5 billion in February alone, putting it on track to be the largest month of inflows since the fund started in 2007.

Agency mortgages are a sweet spot for investors willing to take on just a little bit more risk than offered by Treasuries, getting more yield than the government debt without the credit risk that goes alongside corporate bonds. Securities backed by home loans have also benefited from the Federal Reserve’s decision to hold off on interest-rate increases, as higher borrowing costs discourage refinancing and increase the duration of these securities.

“Even though something like HYG may seem more attractive for yield hunters, mortgages are a way to get a nice coupon while still being cautious,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital, referring to the iShares iBoxx High Yield Corporate Bond ETF by its stock ticker. “It’s about finding yield with safety.”

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Like Bill Gross’ Janus-Henderson bond fund, the iShares Mortgage ETF has performed relatively poorly.

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Partly, investors are running for cover. But some like the iShares Mortgage ETF dividend yield of 9.15%. Especially with the 10-year Treasury Note yielding only 2.66%.

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