After the financial crisis in 2008, securities based on mortgages, a little simplified (and sloppy) called junk bonds , got a bad reputation in the market. Of course, it was not that strange because the housing market collapsed, and despite the fact that securities with housing as an underlying asset need not be bad in themselves, the entire market was included in the case. Many investors who made use of just these, in fact, faced substantial losses.
However, it did not take many years for these interest-bearing securities to make a comeback, and today they form a large part of the bond market again. A big reason is that they have found their way back into a number of exchange-traded funds (ETFs) focused on housing stock.
What is an ETF?
An ETF is also called an exchange traded fund. It is a fund that complies with the same strict regulations as other funds, and which usually follows some form of index. Unlike ordinary mutual funds, however, ETFs are in principle traded as ordinary shares and securities on the stock exchange. Their prices change continuously during the trading day and they usually have a higher daily liquidity and lower fees than fund units, which makes them attractive to individual investors. On the other hand, fees in the form of brokerage are added to the brokers, just as with ordinary stock trading.
Before investing in ETFs
Before deciding to invest in an ETF, it is important to understand what MBS (Mortgage-backed security) is. It is a form of securitized credit that includes home mortgages, and they are created when a company buys mortgages in bulk, repackages them and resells them to investors. The upside for the investor is the opportunity to take advantage of the cash flow that is available in these home loans.
If you are facing a decision where you are considering buying parts of an ETF, you first need to find out where the mortgage-related securities were purchased from, and what support and protection networks are behind it.
“The loan ETFs are quite uncommon in Sweden, but if there are, they are fairly safe paper that does not fluctuate as much in value, as they are completely related to the Mortgage loan and it is a fairly safe asset to own.” / Pious Halsenson, CEO of Expertise Mortgage
Is it worth it?
Since ETFs tend to be backed by relatively secure banks and institutions today, the credit quality of the underlying loans is usually quite high. As an ETF investor, you can be sure that you are unlikely to fall into equally risky subprime loans and mortgages that laid the foundation for the great devastation that arose when the housing bubble collapsed in the United States.
With the emergence of EFT in recent years, it has become easier for ordinary investors to trade with MBS, so just make sure you understand both the risks and the profit opportunities in this investment form before you trade, and as usual, you yourself are responsible for your purchases, sales, profits and losses.