Regan Fixed Rate MBS ETF (MBSX)

The Regan Fixed Rate MBS ETF (ticker MBSX) provides broad exposure to agency mortgage-backed securities backed by pools of fixed-rate home mortgages. These are loans where the borrower pays the same interest rate for the entire term, usually 15 or 30 years, and the cash flows from those mortgages are bundled and sold as securities to investors. MBSX holds exclusively fixed-rate mortgages, as opposed to adjustable-rate mortgages, making it straightforward to predict the coupon the fund will earn.

Fixed-rate mortgages and the securities that follow

A fixed-rate mortgage is a promise by a homeowner to repay a loan at a constant interest rate for a specified term — most commonly 30 years, but 15, 20, and other terms exist. The homeowner makes a monthly payment that covers interest and principal, and that payment amount never changes (absent changes to taxes, insurance, or escrow amounts that the lender holds).

From the investor’s perspective, a mortgage-backed security is a claim on the cash flows from a pool of these mortgages. If the pool contains 5,000 mortgages each averaging $300,000 at 6.5% interest, the investor holds a pro-rata share of that $1.5 billion in mortgages and receives a monthly distribution representing their share of the interest and principal paid that month.

The key feature of fixed-rate MBS is predictability: the coupon is fixed, so investors know exactly how much interest will be earned each month, and that knowledge does not change (unless the mortgages in the pool are paid off, either by prepayment or maturity). This is different from floating-rate MBS, where the coupon adjusts with market rates.

Agency guarantees: the credit foundation

MBSX holds only agency MBS, meaning the mortgages are either issued by or guaranteed by Fannie Mae, Freddie Mac (both government-sponsored enterprises, or GSEs), or Ginnie Mae (a fully government-owned entity). This guarantee is what makes MBS credit-risk-free in practical terms; even if homeowners default on their loans, the agency promises to make the investor whole on principal and interest.

This is why MBS trade with minimal credit spread and why their yields are lower than corporate bonds of similar average maturity — the government guarantee removes credit risk from the equation. For conservative investors and institutions that must hold investment-grade securities, agency MBS are core holdings.

Prepayment risk: the complexity beneath the surface

Although the coupon is fixed, the life of the security is not. Homeowners can pay off their mortgages early, either by selling the home, refinancing into a new loan (usually when rates fall and it becomes advantageous), or simply paying down the balance early. When prepayments happen, principal returns to the investor faster than expected.

This is called prepayment risk, and it cuts two ways. If rates fall, homeowners refinance, mortgages in the pool are paid off early, and the investor gets back principal that now must be reinvested at lower rates — a bad outcome in a falling-rate environment. Conversely, if rates rise, refinancing becomes unattractive, prepayments slow, and the mortgage pool lasts longer than expected (extension risk), locking the investor into a fixed coupon that is now below market rates.

Because of prepayment risk, MBS do not have a fixed duration (interest-rate sensitivity). A nominal 30-year mortgage might have an effective duration of three years (if prepayments are expected to be heavy) or seven years (if prepayments are expected to be light). This makes MBS harder to use for matching liabilities than Treasuries of the same maturity, and it is why MBS investors must understand prepayment dynamics.

Yield and income characteristics

MBSX generates income from the coupon payments (interest earned on the mortgages), which is passed through monthly to fund shareholders. The yield on the fund tracks the current level of coupon yields in the MBS market. When mortgage rates are low (recent years), coupon yields have been low; when mortgage rates are high, coupon yields are higher.

The yield is not risk-free income, though. In a rising-rate environment, the market value of fixed-rate MBS falls because higher-yielding mortgages become available; the fund’s holders suffer a capital loss even though the monthly coupon payment is steady. The reverse is true in a falling-rate environment: rising prices offset the lower coupon yield for total return purposes.

For retirees and income-focused investors, MBSX provides a stable monthly distribution (assuming no unexpected prepayments), but that income should be understood as one part of total return, not as guaranteed returns immune from market conditions.

Mortgage pools and turnover

MBS pools are not static. Mortgages within a pool mature over time as they reach their nominal terms (a 30-year mortgage issued 30 years ago matures). Mortgages are also prepaid as homeowners refinance or sell. MBSX’s underlying index (or the fund’s selection methodology) continuously rolls into newer mortgage pools as older ones run off or prepay.

This turnover is handled within the fund without the shareholder having to do anything, but it means the specific mortgages backing the fund today will be gone in a few years, replaced by a newer cohort. This is normal and expected.

The market context: MBS as inflation and recession indicator

The mortgage market is sensitive to economic conditions and Fed policy. When the Fed raises rates to fight inflation, mortgage rates rise, homeowners stop refinancing, prepayments slow, and the duration of MBS portfolios stretches (not desirable in a rising-rate environment). When the Fed cuts rates to support the economy, mortgage rates fall, refinancings surge, prepayments accelerate, and MBS duration compresses (happening at the worst time, when rates are already low and reinvestment is difficult).

This makes MBS particularly useful as a diversifier: they behave differently from Treasuries and credit bonds under different rate scenarios, so holding all three across a bond portfolio reduces overall risk.

How to evaluate MBSX and similar MBS funds

Start with the fund’s fact sheet: note the current yield, average coupon, weighted average maturity, and estimated duration. These numbers change monthly as new mortgages enter the pool and older ones prepay.

Compare the fund’s gross and net expense ratios to other MBS funds; a few basis points matter in a market where spreads are tight. Check the rolling return history, particularly how the fund performed during the 2022 rate shock (when MBS suffered steep losses as the Fed raised rates aggressively) and during the 2023–2024 recovery. Look at the fund’s composition: does it hold mostly current-coupon mortgages (recent originations at current rates) or a blend of older and newer coupons? Older-coupon mortgages may have heavy prepayment expectations.

Finally, understand the key number for your own circumstance: in a given rate environment, what is the fund’s expected duration, and is that duration profile appropriate for the rest of your portfolio? MBS are not a “buy and hold forever” instrument; they are a component of a broader fixed-income strategy.