The Schwab Mortgage-Backed Securities ETF (SMBS) seeks to track an index of U.S. mortgage-backed securities, which are bonds backed by pools of residential mortgages that provide regular income payments from homeowner mortgage payments and principal repayments.
How It Works
SMBS uses a passively managed approach to replicate its benchmark index of agency and non-agency mortgage-backed securities. The fund holds a diversified portfolio of MBS with varying maturities, credit qualities, and prepayment characteristics. Holdings are weighted based on market value outstanding, with periodic rebalancing to maintain index alignment. The strategy focuses on investment-grade securities to balance yield generation with credit risk management.
Key Features
- Zero expense ratio makes this one of the lowest-cost ways to access mortgage-backed securities exposure
- 4.01% dividend yield provides attractive monthly income from underlying mortgage payments and principal repayments
- Newly launched fund from established Schwab platform offers institutional-quality MBS access to retail investors
Risks
- This ETF can lose value when interest rates rise, as mortgage-backed securities are highly sensitive to rate changes, potentially declining 5-10% for each 1% rate increase
- Prepayment risk occurs when homeowners refinance mortgages early during rate declines, forcing reinvestment at lower yields and reducing expected returns
- Credit risk exists if underlying mortgage borrowers default, though agency MBS carry government backing while non-agency securities face direct credit exposure
Who Should Own This
Best suited for income-focused investors with 2-5 year time horizons seeking monthly cash flow and moderate interest rate risk tolerance. Appropriate as 5-15% satellite holding in diversified portfolios. Ideal for retirees or conservative investors wanting higher yields than Treasury bonds but accepting mortgage market volatility.