Schwab Debuts Low-Cost Mortgage-Backed Securities ETF

Schwab Asset Management is expanding its fixed income lineup with the launch of a mortgage-backed securities ETF on or around Nov. 19, giving investors a low-cost option for gaining exposure to the MBS market.

The Schwab Mortgage-Backed Securities ETF (SMBS) will track the Bloomberg US MBS Float Adjusted Total Return Index with an expense ratio of .03%, according to a company press release.

As interest rates potentially trend lower in 2024, investors are reevaluating their fixed income allocations and showing increased interest in intermediate-duration securities, said David Botset, managing director and head of innovation and stewardship at Schwab Asset Management.

The ETF launch comes as fixed income ETFs have captured the second-largest flows of any ETF category through October, Botset noted. U.S. fixed income ETFs have gathered $194 billion in net inflows year-to-date, according to the latest etf.com monthly ETF flows data.

Meeting Client Demand

Rather than timing the market, Schwab developed SMBS in response to client needs for fixed income diversification, Botset said.

The fund will invest in mortgage-backed pass-through securities guaranteed by government agencies including Ginnie Mae, Fannie Mae, and Freddie Mac, according to the prospectus.

To make this government-backed investment strategy accessible to a broad range of investors, Schwab set pricing as a key priority, according to the release.  

“We really want to take the matter of pricing out of the consideration set when an investor is selecting amongst the Schwab ETFs,” Botset said, noting the 0.03% expense ratio matches other Schwab fixed income index ETFs.

With a duration of approximately six years, SMBS aims to serve investors looking to extend duration as the interest rate environment evolves, Botset explained.

“As we are starting to see the shape of the curve change with the Fed starting to reduce interest rates, investors are reevaluating that allocation,” he said. “We are seeing more movement into the short and intermediate space of the curve, and that's the role that the Schwab mortgage-backed securities ETF can play.”

The launch coincides with Schwab Asset Management’s 15th anniversary in the ETF space, where it has grown to become the fifth-largest provider with over $385 billion in assets, according to etf.com data.