Vanguard Mortgage-Backed Securities ETF (VMBS) provides exposure to mortgage-backed securities issued by U.S. mortgages agencies, such as Ginnie Mae, Freddie Mac, and Fannie Mae. As of October 2014, Agency MBS represented 20.7% of the Barclays U.S. Aggregate Bond Index. Because of their large representation within the benchmark, MBS may be used as a tactical investment when investors think mortgages are cheap relative to Treasuries and corporate bonds.
While mortgage-backed securities issued by Fannie Mae and Freddie Mac are not explicitly guaranteed by the U.S. government, investors commonly assume that there is an implicit guarantee that the government will back the bonds’ interest and principal payments. These agencies are private companies created by the government with a public mission: to make mortgage financing more affordable. During the 2008 financial crisis, the U.S. Federal government made substantial investments in Fannie Mae and Freddie Mac to improve their liquidity and allow them to support their liabilities and mortgage-backed securities in exchange for preferred shares. This ownership stake, coupled with the agencies’ public mission and importance to the refinancing market, suggests that the government may provide support if mortgage troubles arise again.
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Thomas Boccellari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.