This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Getting Fatter Yields With Mortgage ETFs

The securities represent pools of home mortgages. As homeowners pay principal and interest, the cash is passed along to investors in the securities. Some of the agencies nearly collapsed during the financial crisis. But they were taken over by Washington. As a result, the mortgage securities now have negligible default risk.

Although they cannot default, the mortgages provide extra yield because they come with the risk of prepayments. These occur when homeowners refinance or sell homes and pay off mortgages.

In the event of a prepayment, investors receive their principal back and must reinvest it at prevailing rates. Prepayments can be damaging during periods of sharply falling rates.





To appreciate the hazard, consider a mortgage security that yields 6%. Now rates drop. Homeowners refinance and take on mortgages that yield 4%. As a result, funds are left holding low-yielding assets.

In comparison, holders of Treasuries have greater certainty because their bonds always pay a fixed rate. For the moment, prepayment risk seems limited because interest rates seem to be hitting rock-bottom levels.

To get some extra yield, try iShares Barclays CMBS Bond (CMBS), which yields 4.38%. The fund invests in mortgages of commercial properties, such as office buildings.

But commercial mortgages can be risky because they are not insured by government agencies, cautions Timothy Strauts, a Morningstar ETF analyst. Although agency mortgages carry Standard & Poor's top rating of AAA, the commercial mortgage fund only has a rating of A-. "If we go into a recession, commercial mortgages could be hurt," cautions Strauts.

At the time of publication, Luxenberg had no positions in funds mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
MBB $110.49 0.00%
MBG $27.38 0.00%
VMBS $53.55 0.00%
AAPL $130.28 0.00%
FB $81.53 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs