A sound investment process and strong management team underpin Vanguard Mortgage-Backed Secs ETF's Morningstar Medalist Rating of Gold. The portfolio maintains a cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The strategy's effective investment philosophy supports a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in AA rated bonds and government bonds compared with category peers. The strategy’s management team earns an Above Average People Pillar rating. The strategy's parent organization earns the firm a High Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Vanguard Mortgage-Backed Sec Idx Fund earns a High Process Pillar rating. Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. This fund tracks an index, which supports the rating. Historical data, like Morningstar's Active/Passive Barometer, shows that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons.

The investment strategy as stated in the fund's prospectus is: 

The investment seeks to track the performance of a market-weighted mortgage-backed securities index.  The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. MBS Float Adjusted Index. This index covers U.S. agency mortgage-backed pass-through securities issued by the GNMA, the FNMA, and the FHLMC. To be included in the index, pool aggregates must have at least $1 billion currently outstanding and a weighted average maturity of at least 1 year. All of the fund's investments will be selected through the sampling process, and and at least 80% of the fund's assets will be invested in bonds included in the index.  

 This strategy has a 3.4% 12-month yield, higher than its average peer's 3.3%. In addition, it has a 3.9% 30-day SEC yield (a measure similar to yield-to-maturity). Higher yields tend to indicate higher credit risk. But that isn't always the case. Over the past 12 months, the average yield of the fund has been higher than the average yield of its Morningstar Category peers. The portfolio holds assets with a higher average surveyed credit quality of AAA, compared with the category average of AA, and it holds no non-investment-grade assets, similar to its peers' average. Lower-credit-risk strategies are often able to navigate bear markets more effectively. In terms of long-term interest-rate risk, this strategy is on par with peers. The longer a strategy's duration, the more sensitive it is to shifts in interest rates. This fund, with a 6.5-year duration, is expected to gain 6.5% of its net asset value if interest rates drop by 1 percentage point, and vice versa.

High

Process

Vanguard Mortgage-Backed Sec Idx Fund benefits considerably from its fixed income team, earning it an Above Average People Pillar rating. The fund takes a solo manager approach, with Joshua Barrickman as the only listed manager at the helm, who brings 18 years of portfolio management experience to the table. They manage a total of 19 strategies, with solid long-term prospects. The strategies average a Gold asset-weighted Morningstar Medalist Rating, indicating a position to deliver positive alpha relative to the category median in aggregate. With only one manager listed on the strategy, the passive strategy is vulnerable to key-person risk. 

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Above Average

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

Parent

Vanguard Mortgage-Backed Securities ETF

VMBS tracks a market weighted index of mortgage-backed securities.

The fund tracks a market value-weighted index of US mortgage-backed securities.

Residential and commercial real estate have their own respective headwinds amid a high-interest rate environment. Still, for fixed income investors wanting to diversify their income before rate cuts happen, mortgage-backed securities (MBS) still remain an option.

Despite Headwinds, Mortgage-Backed Securities Diversify Income

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares is a potential beneficiary of the current cycle shift in the market. The VMBS ETF invests in U.S. agency mortgage-backed pass-through securities and offers a cost-effective platform with a low expense ratio. The VMBS fund provides steady income, low credit risk, and diversification benefits, but is susceptible to interest rate and refinancing risks.

VMBS: A Beneficiary Of Lower Rates

The Vanguard Mortgage-Backed Securities ETF has experienced losses due to rising interest rates and bond yields. The FolioBeyond Alternative Income and Interest Rate Hedge ETF may provide a hedge against rising interest rate exposure. A 40/60 portfolio of VMBS/RISR could potentially generate a mid single-digit yield and high single-digit total returns.

VMBS: Revisiting VMBS Thesis With RISR As A Hedge (Rating Upgrade)

The Vanguard Mortgage-Backed Securities Index Fund ETF offers a diversified portfolio of Agency MBS bonds. The Agency MBS asset class is attractive due to the historic wide spreads on Agency MBS bonds versus Treasuries, particularly on the long side of the curve. The Vanguard Mortgage-Backed Securities Index Fund ETF experienced a deep drawdown in 2022 due to higher rates, but is expected to outperform going forward.

VMBS: Agency Mortgages, A Top Idea From JPMorgan

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The VMBS provides exposure to agency-MBS securities. Historically, MBS have provided modest returns and low volatility. However, 2022 was especially bad for the VMBS ETF due to the portfolio's 6.9-year duration.

VMBS: Modest Yields Becoming Unattractive

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Mortgage rates have not been this high since before the housing crisis. And while the housing market is slowing, prices are still high.

High Mortgage Rates And High Inflation

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After a strong run following the pandemic, home prices are starting to come back down to earth. Rising interest rates have been tamping down home prices, which have been putting off prospective home purchasers.

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Weakness in the overall bond market and rising interest rates are hurting debt issues backed by mortgages, but this could be providing value opportunities for investors who are on the hunt for bargains in mortgage-backed securities (MBS). The U.S. Federal Reserve is offloading a number of assets it accumulated during the height of the pandemic [.

Mortgage-Backed Securities Could Provide Bond Investors With Value

In the latest minutes from its March meeting, the U.S. Federal Reserve gave the capital markets a sneak peek of how it's going to lighten its balance sheet, particularly when it comes to mortgage-backed securities (MBS). The Fed is fresh off instituting a rate hike of 25 basis points.

The Fed Reveals Plan to Scale Back Mortgage-Backed Securities Holdings

Rising interest rates are souring the taste for refinancing transactions, according to CNBC. When rates rise, this could open up opportunities for exchange traded funds (ETFs) like the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS).

Refinancing Rate Falls, Opening up an Opportunity for This ETF

In the current economic environment where global inflation is rampant, foreign investors seem to be favoring asset-backed securities, including mortgage-backed securities (MBS). There are a number of inflation hedging strategies that investors may want to consider, including real assets like gold or real estate.

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While the major news in the capital markets continues to be the Omicron variant, fixed income investors will also be eyeing the Federal Reserve. In the meantime, consider mortgage-backed securities (MBS) exposure.

As Markets Await Fed, Get Exposure to Mortgage-Backed Securities

Inflation is running hot while the Federal Reserve is looking to taper its stimulus measures, but this could all be of benefit to mortgage-backed securities (MBS). The consumer price index hit a three-decade high in October, and the real estate market isn't getting cheaper.

As Inflation Runs Hot and Fed Tapers, This MBS ETF Could Benefit

Mortgage interest rates are on the way up, which may not be a positive sign for current or prospective homeowners, but is a welcome sign for the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS). Having seen enough economic data to warrant an increase, the Federal Reserve recently noted that it would taper off its [.

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Fixed income investors looking to safely diversify their portfolios beyond safe haven Treasury notes can opt for the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS). “Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property,” an Investor.gov article explained.

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The looming threat of rising interest rates doesn't have to be daunting when ETF investors embrace the phenomenon with funds like the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS). If a fixed income investor wants maximum yield on safe haven Treasury notes, they have to go as far out on the yield curve as [.

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