Mortgage rates are rising again — and that’s bad news for homebuyers and refinancers. But, it may be an exciting opportunity to make money for investors looking at mortgage-backed securities (MBS) ETFs.

With the most recent figures indicating a big decline in mortgage applications, the conditions are ready for MBS ETFs to pick up steam as yields increase and prepayment risks get diminished.

Why MBS ETFs Stand To Gain

MBS ETFs are invested in mortgage-backed securities, which are home loan-backed debt securities. When housing rates rise, newly issued MBS gain more yield, which is desired by investors who want fixed-income exposure.

At the same time, old MBS experience a deceleration in prepayments, as more homeowners choose not to refinance at higher rates.

There are some choice MBS ETFs that should profit through the prevailing conditions:

iShares MBS ETF MBB: One of the largest MBS ETFs, MBB primarily holds agency-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

Vanguard Mortgage-Backed Securities ETF VMBS: This ETF offers exposure to high-quality, government-backed MBS with relatively low volatility.

SPDR Bloomberg Barclays Mortgage Backed Bond ETF MBG: MBG provides a diversified portfolio of investment-grade MBS.

Also Read: Homebuilder ETFs Await Clearer Signals Amid Housing Market Uncertainty

Shake-Up In The Mortgage Market And Rising Rates

The average 30-year fixed mortgage rate increased to 6.72% for the week through March 14, reversing a nine-week slide, the Mortgage Bankers Association (MBA) reported. The increase in this rate pushed refinancing applications down a substantial 13%, although purchase applications rose a mild 0.1%.

Investors are preparing for possible market movements after the Federal Open Market Committee’s decision on Wednesday to hold rates at 4.25%-4.50%.

A Balancing Act

Though higher mortgage rates create headwinds for housing affordability and refinancing volume, they also offer fixed-income investors a chance. Higher yields and less prepayment risk potential make MBS ETFs an appealing option in this situation.

But it will be wise to stay guarded. The Fed’s policy orientation, inflation dynamics, and overall economic climate will be key in determining MBS performance. If rates keep on rising, MBS ETFs may face additional tailwinds. But if economic uncertainties force the Fed to shift gears in favor of rate cuts later this year, the picture will change once again.

For the time being, MBS ETFs are an attractive choice for investors seeking to take advantage of the changing interest rate landscape.

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