The market squall set-off by subprime mortgages has not stopped Barclays from a Friday launch of its new mortgage-backed securities-based ETF, MarketWatch notes. Although the American Stock Exchange launch comes in the midst of concerns about mortgage-linked securities, the iShares Lehman MBS Fixed-Rate Bond Fund may be well insulated, analysts said. Still, it will have to overcome public perception to prove its place in investors’ portfolios. "These are not subprime mortgages and I wouldn't classify this ETF as a risky security," Greg McBride, senior financial analyst at BankRate.com, told MarketWatch. Subprime loans typically target lower-income house hunters who cannot meet the credit score and other requirements of other banks. With an expense ratio of 0.25% the new ETF instead tracks an index of investment grade fixed-rate mortgage-backed securities by government-sponsored mortgage issuers Ginnie Mae, Freddie Mac, through which all principal and interest go directly to investors and which are non-convertible. The underlying investments are 30, 20 and 15-year securities with more than $250 million in outstanding face values, according to Barclays. Rather than hold all 387 securities within the Lehman index as of February, Barclays Global Investors will use that group as a benchmark. Mortgage-backed securities can be high-yield as managers compensate investors for times when interest rates are low, and home-owners pay loans early, refinance or buy newer, bigger houses. Such events introduce uncertainty, and result in a drop in fund value, according to the ETF’s prospectus. "Because of prepayment and extension risk, mortgage-backed securities react differently to changes in interest rates than other bonds," the prospectus notes. "Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain mortgage-backed securities." Some think the new ETF can’t avoid the sector fall out, though. "If real estate is all about location, and the stock market is all about timing, then this fund is wrong on both counts," said Jim Lowell, editor of MarketWatch's ETF Trader. Still, timing the launch of a new, regulated, product is always a challenge, and Matt Tucker, head of Barcalys investment solutions team, said that the firm’s interest is not in launching finds to meet fads anyhow. Instead the new product helps toward "filling holes" in its fixed-income product line, Tucker said. The firm now manages 15 fixed-income ETFs. Barclays is also trying to beat competitor Vanguard to the punch, and to protect its market dominance, which was earned, largely, though first-mover advantage. Some stress the need for such a high-yield product for investors seeking diversity. "These aren't the junk mortgages you read about in the papers," said Matt Hougan, editor at IndexUniverse.com. "Fannie, Freddie and Ginnie mortgages just don't have that much risk, even with the housing market imploding," he said, adding that the historical volatility of the ETF's tracking index has been "tiny." Herb Morgan, head of Efficient Market Advisors, said "there's a market" for a mortgage-backed securities ETF and expects the fund to pick up solid asset flows and trading volume. However, the new ETF could suffer from "headline risk" because even though the worries in subprime shouldn't impact the holdings, those fears will affect how the ETF is perceived, said Morningstar Inc. analyst Sonya Morris. "This ETF is fairly conservative for a mortgage-backed securities fund since the agency-backed mortgages must meet credit requirements," said Morningstar Inc. analyst Sonya Morris. The ETF could be used to diversify exposure to the bond market, and it "makes sense to own high-quality mortgage bonds" as part of a long-term portfolio, Morris said. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.
