The 4.5% Yield Is Only Half The Story

"When bond investors chase yield, they often overlook the engine that drives total returns: price appreciation from interest rate movements. The iShares MBS ETF (NYSEARCA:MBB) demonstrates this dynamic perfectly. While its 4% yield attracts income seekers, the fund has benefited from mortgage-backed securities price movements in recent periods. What MBB Actually Does MBB provides exposure to agency mortgage-backed securities, the bonds backed by Fannie Mae, Freddie Mac, and Ginnie Mae. These aren't the risky subprime mortgages from 2008. They carry implicit or explicit government guarantees, eliminating credit risk. What remains is interest rate sensitivity and prepayment risk."

"MBB's scale creates meaningful advantages for investors. The fund manages $39 billion in assets, allowing institutional-level efficiency that translates to a 0.04% expense ratio among the lowest in fixed income. This cost structure compounds over time, ensuring more mortgage interest flows through as monthly dividends rather than being consumed by fees. The past year illustrates how MBB generates returns beyond its yield. The fund delivered strong total returns, with the majority coming from price appreciation as mortgage spreads compressed."

MBB provides exposure to agency mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, removing credit risk but leaving interest-rate sensitivity and prepayment risk. The fund manages roughly $39 billion in assets and charges a 0.04% expense ratio, enabling efficient pass-through of mortgage interest as monthly dividends. Recent strong total returns were driven largely by price appreciation as mortgage spreads compressed, supplementing the roughly 4% yield. Duration risk caused meaningful losses during the 2022 rate spike, and prepayments can force reinvestment at lower yields when rates fall.

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