The pairing of exchange-traded funds to residential mortgage-backed securities is no new concept, but 2025 looks like it is turning into a renaissance year for RMBS ETFs, based on recent trends.
Since November 2024, the bond market has seen at least four new issuances from investment banks, including the likes of JPMorganChase, Charles Schwab, Regan Capital and Morgan Stanley's Eaton Vance unit. While the mechanism for MBS ETF creation has been in place for close to 20 years, the convergence of a wide variety of factors, including soundness of the assets, investors' search for diversification and a maturing segment, has banks taking a look at bringing the
The decision to introduce an agency-backed MBS fund by Schwab Asset Management "came from the combination of where we had an existing gap in our product suite, despite the fact that we already had existing expertise," and consideration of "how we could round out our offerings," said Rizwan Hussain, director and investment portfolio strategist at the firm.
Some of the appeal of MBS ETFs lies in the backing the vast majority of mortgage originations in the U.S. receive, which offers some protection against volatility that makes other bond segments more volatile.
"Securities from Fannie Mae, Freddie Mac, Ginnie Mae have either explicit or implicit guarantees from the US sovereign, whereas corporates obviously do not," Hussain continued. "That makes agency mortgage-backed securities more attractive."
Elevated spread levels in mortgage-backed securities compared to Treasurys since the end of 2022 are also contributing to recent interest, added Ward Bortz, ETF portfolio manager and head of distribution for US wealth at Angel Oak Capital Advisors.
"Spreads are really wide. Because spreads are wide, that means the yields available are high," Bortz said.
A brief history of the mortgage ETF market
While they appear to be an increasingly popular investment opportunity today, interest in such products wasn't always near current levels. The first MBS ETF came from Barclays Global Investors in 2007, as cracks from the subprime crisis began to emerge, likely putting a chill on any initial momentum for mortgage-backed assets it might have brought.
Trading of the first ETFs, which give investors options to take advantage of the performance of securities without holding ownership of the underlying assets themselves, only began in the early 1990s themselves in U.S. markets. The investment banks, called authorized participants, responsible for facilitating and redeeming MBS funds were entering new territory at the time in what was still a nascent industry.
"They didn't know how to situate themselves between the buyers and the sellers because ETFs in general were new. And MBS ETFs — they just started dabbling," said Seddik Meziani, professor of finance at Montclair State University.
"But now they are more sophisticated, and there's liquidity in there that did not exist at that time. The structure of the market itself changed. The market is deeper." Meziani continued, describing the latest newfound sentiment.
Also contributing to the recent uptick in investor interest is evidence of strong historical performance, experts said. Net assets of the MBS ETF portfolio belonging to Blackrock, which acquired the original Barclays fund, have grown from approximately $7 billion in 2015 to over $40 billion today. A similar Vanguard ETF also increased almost tenfold to $15 billion over the same period.
What about nonagency mortgages?
"The problem with this is all you can do is buy agency mortgage-backed securities," noted Bortz.
Most mortgage ETFs available are almost entirely, if not exclusively, comprised
It's a hole that firms like Angel Oak have tried to fill in recent years as they recognized the potential value in nonagency residential securitizations.
Angel Oak Capital is among the issuers with a split between both agency and nonagency holdings after its early 2024 launch of a residential MBS fund, which includes both prime jumbo
While JPMorganChase's offering is dominated by agency MBS, it also includes a slice of non-qualified mortgage securities along with commercial securities.
The reasoning behind Angel Oak's ETF launch was to create "more sophisticated" investment opportunities that introduced value beyond the readings of a single index, even if they held more risk. As with all mortgage securities, issuers run stress tests of the holdings to address potential risks, including prepayments and default.
"We ought to manage more money, so we think 'What can we do that's better?'" Bortz said. "And hopefully people want to buy into that."
The role of retail trading today
The rise of MBS ETFs coincides with developments in recent years that have broadly led more consumers to take a hands-on approach in financial trading, experts said.
While headlines surrounding an influx of retail investors focus on how they've piled on to stock purchases, recent trends show some spillover into bond trading, including in MBF ETFs, Meziani noted.
"Institutional investors are still dominating the market, but you have more and more retail investors that are coming in," he added. "Retail investors are being brought into the market more and more by their advisors."
Although stock indexes have performed strongly in 2025, "they remember the word 'diversification,'" he added. "You shouldn't have only equity instruments. You should also have debt instruments in our portfolios."
The growing availability of trading information and education in recent years has changed markets in such a way that some investors are comfortable
"What has happened over the last five years, in particular with ETFs, is that the launch and growth of the ETF space has really democratized the investment landscape and allowed investors to gain access to parts of the financial markets they maybe didn't have as much access to historically in a liquid, transparent, tax-efficient way," he said.
