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.
The $15 billion iShares MBS ETF (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 Treasuries offer, getting more yield than the government debt without the credit risk that goes along with 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."
MBB's indicative yield is 3.3%, topping the 2.2% yield for the iShares 1-3 Year Treasury Bond ETF, which tracks U.S. Treasury bonds maturing in one to three years.
The mortgage fund's issuer, BlackRock Inc., cut the management fee on MBB by two-thirds in July 2017. The cheaper price tag was aimed at attracting institutional investors that traditionally have purchased mortgage bonds directly, the firm said at the time.
Mutual funds focused on mortgages have also been raking in cash, with the category seeing net inflows of about $1.42 billion during the week ended Feb. 13, according to Lipper US Fund Flows data. Now at six consecutive weeks, this is the longest period of uninterrupted inflows since at least March 2017.
Risk premiums on mortgage bonds currently sit at about 0.36 percentage point, about 0.1 percentage point higher than levels reached last summer, giving some analysts hope that mortgages could still outperform other asset classes like Treasuries.