Vanguard Mortgage-Backed Securities ETF

VMBS

Market cap $14.5B

As noted in USA Today, dipping mortgage rates could be attributed to the improving sentiment of bond investors. That's especially the case for those investing in mortgage bonds.

The prospect of lower rates could translate to falling yields, forcing investors to diversify their fixed income portfolios. One area that's been seeing renewed interest is mortgage-backed securities (MBS).

Mortgage-backed securities (MBSs) ETFs have, somewhat quietly, welcomed some big new players in the past year.  Just this week, Eaton Vance debuted the Eaton Vance Mortgage Opportunities ETF (EVMO).

Vanguard Mortgage-Backed Securities Index Fund ETF Shares offers exposure to agency MBS with no credit risk, benefiting from elevated spreads and attractive yields versus Treasuries. The fund's convexity and intermediate duration position it to outperform as rates decline, especially during aggressive Fed rate cuts. Political and macro factors suggest lower rates by mid-2026, with a likely new Fed chair supporting further easing.

Treasuries have been the default go-to safe haven bonds during times of heavy market volatility. But with Moody's recent downgrade, an opportunity for mortgage-backed securities (MBS) exists.

Investors were eager to close the books on April's tariff-fueled market tantrum, which left both the Dow and S&P 500 riding three-month losing streaks despite a recent rebound. Equity ETF flows cooled, while fixed income ETFs put on a decisively skittish performance.

Rising tariff turmoil has sparked a run from credit-sensitive instruments, with escalating trade tensions threatening economic stability. Wednesday's GDP print stoked recessionary fears when it showed the U.S. economy contracted for the first time since early 2022.

Given the enormity of its market size, it would serve a fixed income investor well to explore opportunities in mortgage-backed securities (MBS) if they haven't already. The space is expanding and undergoing electronification, making it larger as well as more efficient.

Consider shifting to areas of the market that are less sensitive to inflation expectations.

Investors may be anxious with potential short-term volatility on the horizon. But opportunities do exist in the fixed income space.