Bond ETF Idea: Commercial Mortgage Backed SecuritiesMarch 7th, 2012 by iShares
By Matt Tucker, CFA iSharesblog.com
ABS, MBS, CMBS. Navigating your way around the various fixed income sectors can sometimes feel like a bowl of alphabet soup. And with the proliferation of fixed income ETFs giving investors more ways than ever to slice and dice the bond market, now’s a great time to brush up on your acronyms.
Take, for example, commercial mortgage-backed securities (CMBS). CMBS are fixed income securities that are backed by loans on things like office buildings, retail properties, and hotels. The sector currently represents about 2% of the US fixed income market.
For investors who have a positive view on the commercial real estate market, CMBS are a way to gain exposure with less risk than real estate investment trusts (REITS). Since its inception six years ago, the Dow Jones US REIT Index has experienced volatility of 30.1% and a return of 2.6%, whereas the Barclays Capital US CMBS Index experienced a volatility of 13.3% and a return of 6.63% during the same timeframe. Keep in mind that REITS are equity securities, whereas CMBS are debt securities.
CMBS also have a compelling income component – compared to sectors that have a similar duration (a measure of bond risk), investment grade CMBS are currently offering a higher yield. Note that in the chart below, CMBS is represented by the Barclays Capital US CMBS Index, which only includes investment grade bonds – there are no subprime bonds in the index.
Fixed Income Sector Comparison
With the recent launch of the iShares Barclays CMBS Bond Fund (NYSE Arca: CMBS), the first ETF dedicated solely to CMBS, investors now have the ability to gain diversified access to this sector in a single trade. We expect to see clients using this fund in a few different ways. One idea: if the investor prefers an overweight to CMBS, they can use it to complement a diversified bond index fund (such as the iShares Barclays Aggregate Bond Fund; NYSE Arca: AGG). Or they may use it in conjunction with other bond index funds to build a customized fixed income portfolio.
About Matt Tucker, CFA
Matthew Tucker, CFA, Managing Director, is a member of the Product Strategy Team within BlackRock’s Fixed Income Portfolio Management Team. He leads the product strategy effort for exchange – traded funds, and leads the platform’s efforts in North and Latin America iShares. His team focuses on developing new fixed income iShares strategies, partnering with the iShares team on product delivery, and supporting iShares client sales.