This is a bond ETF that tracks an index of investment-grade mortgage-backed securities issued or guaranteed by US government agencies. It holds a broadly diversified portfolio, primarily of pass-through securities.

It is well suited to conservative investors who want to add stable bond assets to their portfolios.

It is a passively managed (index-tracking) ETF operated by Schwab.

The fund invests most of its net assets in investment-grade mortgage-backed pass-through securities issued or guaranteed by government agencies, and it also uses TBA (to-be-announced forward mortgage) transactions. It rebalances regularly to reflect changes in the weights of the index constituents.

• Focus on government agency-guaranteed bonds keeps credit risk relatively low
• A passive bond ETF with a low expense level

Assets under management (AUM) stand at $6.4B, and the total expense ratio is 0.03% per year.

Differences in fees and liquidity versus comparable mortgage-backed securities ETFs serve as the key selection criteria.

The fund shows the typical pattern of bond prices rising and falling with changes in the interest rate environment, and given its duration characteristics, it continues to react sensitively to interest rate moves. Over the long term, its direction tends to diverge sharply depending on shifts in the interest rate cycle.

Fund flows tend to follow demand for bond allocations and the phase of the interest rate cycle, and during periods of market volatility, money is sometimes observed flowing into government agency-guaranteed bonds as a safe-haven asset.

Its main strength is the stability that comes from a focus on government agency-guaranteed bonds, while price sensitivity to interest rate changes is a point to watch.

The MBB, VMBS, and SPMB shown in the table are all similar ETFs that track the same government agency-guaranteed mortgage-backed securities, and they differ in issuer and expense level. JMBS and JMTG are both similar-category products with an added element of active management. Broadening the view to bonds overall, AGG, which centers on US Treasuries, and LQD, which centers on corporate bonds, are also worth comparing as alternatives.

Here are the points to review before investing in SMBS. Although the fund holds government agency-guaranteed bonds, its interest rate sensitivity and prepayment characteristics should be confirmed in advance, and it is also advisable to consider how much of your overall allocation goes to bonds.

Interest rate changes and mortgage prepayment patterns are the main drivers of short-term price fluctuations. During sharp rate increases, even a bond asset can post unrealized losses, and investors should also be mindful of the risk that rising prepayments lower reinvestment yields.

It is recommended as a suitable option for conservative bond investors who want diversified exposure to government agency-guaranteed mortgage-backed securities at a low expense ratio, and it is worth considering when increasing the bond weighting in a portfolio.