Mortgage Rates Hit 2025 Lows: 3 MBS ETFs To Consider - Simplify MBS ETF (ARCA:MTBA), Schwab Mortgage-Back

In the week ended Feb. 21, U.S. mortgage rates declined to their lowest levels this year, Bloomberg reported, presenting potential opportunities for investors in mortgage-backed securities (MBS) ETFs. Although the decline was not deep enough to trigger increased lending activities immediately, the persistent market uncertainty might give real estate investors something to cheer about one of these days. ETFs are a great way to stock up now to reap the benefits of MBS later.

Three MBS-backed ETFs that combine high credit quality with attractive yields, are:

Vanguard Mortgage-Backed Securities ETF (NASDAQ:VMBS): VMBS seeks to track the performance of the Bloomberg U.S. MBS Float Adjusted Index, primarily investing in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The fund offers a low expense ratio of 0.04% and provides investors with a diversified portfolio of MBS.

Simplify MBS ETF (NYSE:MTBA):

Launched in November 2023, MTBA focuses on higher-coupon MBS, aiming to provide enhanced yield and total return potential. The fund invests in To-Be-Announced (TBA) contracts, which are MBS forward contracts offering improved liquidity and operational simplicity. MTBA is designed to capitalize on dislocations in the MBS market and offers a yield of nearly 6%. The expense ratio is even lower at 0.25%.

Schwab Mortgage-Backed Securities ETF (NYSE:SMBS):

SMBS provides exposure to U.S. agency mortgage-backed securities, aiming to track the performance of the Bloomberg US MBS Index. The fund offers investors access to a diversified portfolio of MBS with a competitive expense ratio of 0.03%, making it a viable option for those seeking income diversification.

Also Read: Mortgage Rates Fall For Fifth Week Straight, But Remain Close To 7%

Word Of Caution

Investors should assess their individual risk tolerance and investment objectives before considering MBS ETFs, as these securities are subject to interest rate risk and prepayment risk.

What Happened?

The recent decline in mortgage rates is largely attributed to a drop in Treasury yields, as investors seek safe havens amid market volatility and economic data indicating weak consumer and business sentiment. The 10-year Treasury yield fell to 4.28% on Tuesday, its lowest since mid-December, driven by concerns over U.S. economic growth and weak consumer and business sentiment. Despite the decline in rates, borrowing costs and home prices remain high. The average 30-year fixed mortgage rate of 6.88% is still a modest decrease from last week, insufficient to significantly boost borrowing, according to Financial Times.

This led to a 3.6% decrease in refinancing applications and a marginal increase in home purchase applications, as reported by the Mortgage Bankers Association (MBA) and cited by Bloomberg. The MBA survey, conducted weekly since 1990, encompasses responses from mortgage bankers, commercial banks and thrifts, covering over 75% of all retail residential mortgage applications in the U.S.

However, near-term inflation expectations have risen due to anticipated impacts from President Trump’s tariffs, with two-year break-even rates reaching their highest levels since early 2023. In this environment, MBS ETFs present a potential opportunity for investors seeking to diversify their bond portfolios and capitalize on the current market dynamics.

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Photo: Shutterstock

MTBASimplify MBS ETF

$49.530.30%

Overview

SMBSSchwab Mortgage-Backed Securities ETF

$25.550.35%

VMBSVanguard Mortgage-Backed Securities ETF

$46.95-%

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