SMBS vs. VMBS: Small Differences Add Up to Big Bucks
- SMBS had huge inflows while VMBS had huge outflows last week.
- It’s unclear exactly what triggered the activity.
Last week’s ETF flows were mostly quiet—until a massive reshuffling in the mortgage-backed securities space stole the show.
As we covered here, the Schwab Mortgage-Backed Securities ETF (SMBS) pulled in a jaw-dropping $4.9 billion. That’s not a typo. A fund that had only $52 million in assets a week ago is now sitting close to $5 billion.
Meanwhile, the Vanguard Mortgage-Backed Securities ETF (VMBS) saw $4.8 billion leave the building, shrinking its asset base from more than $19 billion to about $14.4 billion.
While it’s unclear exactly what triggered the move, it was almost certainly a big portfolio shift—either a major institution swapping exposure or a tweak to a model portfolio.
So what’s the actual difference between SMBS and VMBS? Not much, actually.
SMBS vs. VMBS: What's the Difference?
Both funds invest in U.S. agency mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac—effectively making them government-backed. They also both track the same benchmark, the Bloomberg US MBS Float Adjusted Index, and both charge identical ultra-low expense ratios of 0.03%—the cheapest in the category. Even their 30-day SEC yields are almost exactly the same, around 4.1%.
Where they do differ is in the way they track the index.
Schwab’s SMBS holds a much broader portfolio, with 3,669 bonds, compared to just 1,417 for Vanguard’s VMBS. (For reference, the index itself contains about 1,008 securities.)
That difference has led to slight variations in interest-rate sensitivity: SMBS has an effective duration of 5.4 years, compared to about 5 years for VMBS. But the impact on returns has been tiny. Since SMBS launched in November, it has gained 3.02%, fractionally ahead of the 2.99% return for VMBS.
Both ETFs have outpaced the $36.4 billion iShares MBS ETF (MBB), the largest ETF in the segment. MBB, which charges a slightly higher 0.05% fee, tracks a different version of the Bloomberg MBS index. Its portfolio is far larger, currently holding 11,185 bonds, and it’s up 2.98% since Nov. 19, the day SMBS launched.
Over longer periods, the small differences can add up: over the past five years, MBB has underperformed VMBS by about 35 basis points (SMBS, of course, wasn’t around yet). But even that's not necessarily all that significant for a pair of funds that declined around 400 basis points during that period.
In other words, the distinctions between these ETFs are minor, with slight differences in portfolio construction, duration and returns. But still, as last week showed, even tiny edges can move billions.
