On Tuesday, Schwab Asset Management launched its latest fund, the Schwab Mortgage-Backed Securities ETF (SMBS).
SMBS operates with a low net expense ratio of 0.03%. The fund aims to provide a similar total return to that of the Bloomberg US MBS Float Adjusted Total Return Index.
A Focused Index
This Bloomberg index focuses on fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. To build the index, to-be-announced deliverable mortgage-backed securities are pooled based on their vintage, coupon, and program.
These pooled securities must have at least one year in average maturity, with at least $1 billion currently outstanding. The index is weighed by market cap, and gets its securities updated on the last business day for each month.
A few types of securities are excluded from the Bloomberg index. This includes collateralized mortgage obligations, non-agency collateral, and 10-year fixed-rate programs, among others.
The Schwab Strategy
To closely track the results of the Bloomberg index, SMBS will invest at least 90% of its assets into securities within the index. However, up to 10% of net assets for the fund may be invested outside of the index’s purview.
That being said, these investments will primarily be made to better track the index itself. For example, the Schwab ETF may invest in a security that the fund managers believe will be added to the index soon. Other non-index securities could include derivatives or cash strategies. These options could help the fund better brunt potential risk from interest rates.
Due to the fund’s index-focused strategy, SMBS will concentrate its industry and sector exposure to a similar extent as the Bloomberg index. Investors interested in this fund may want to check the sector exposure of the Bloomberg index before deciding to make the plunge.
More than 30 Schwab funds are currently available in the United States, leveraging Schwab’s immense financial management expertise. These ETFs represent well over $390 billion in assets under management.
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