The 4.5% Yield Is Only Half The Story

Core Insights - The iShares MBS ETF (MBB) illustrates the importance of price appreciation in total returns, beyond just yield, particularly in the context of interest rate movements [1][4] Fund Overview - MBB provides exposure to agency mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae, which carry government guarantees, thus eliminating credit risk [2] - The fund manages $39 billion in assets, resulting in a low expense ratio of 0.04%, enhancing efficiency and ensuring more income flows to investors [3] Return Dynamics - MBB has shown strong total returns over the past year, primarily driven by price appreciation as mortgage spreads compressed, alongside a steady 4% yield [4] - The fund's performance is influenced by interest rate sensitivity and prepayment risk, which can affect future income [6][7] Investment Considerations - MBB may not be suitable for investors with short time horizons or those prioritizing capital preservation due to potential monthly swings of 2% to 3% during rate volatility [8] - Growth-focused investors may find MBB limiting, as it serves more as a diversification tool rather than a wealth-building investment [9] Alternative Options - Vanguard's Mortgage-Backed Securities ETF (VMBS) offers a lower annual fee of 0.03%, which can lead to significant savings over time for long-term investors [10] Best Use Case - MBB is best suited as a core bond holding for investors who understand the dual return mechanism of mortgage-backed securities, contingent on favorable rate environments and manageable prepayment risk [11]