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Simplify Asset Management Launches a Mortgage-Backed Securities ETF with a Twist

There are already ETFs in the market that invest in mortgage-backed securities. But the MTBA ETF focuses on recently issued ones.

In a market where many asset managers are trying to limit volatility for their investors while simultaneously offering them investment options with higher yields, there is a growing number of alternatives ETFs to choose from. New York City-based Simplify Asset Management has been specializing in options-based ETFs since 2020 and several weeks ago added another to its line-up. On Nov. 7, the firm launched Simplify MBS ETF (MTBA)—a fund that invests in mortgage securities backed by Fannie Mae.

The fund seeks to deliver yields of approximately 6% by investing in newly issued mortgage securities that are guaranteed by the U.S. government-sponsored agency. After seven days of trading, MTBA had already raised $85 million, with no seed capital, according to Harley Bassman, managing partner with Simplify and the creator of the ETF’s investment strategy. (MTBA shares are trading at around $50). Many people already invest in ETFs that focus on mortgage-backed securities benchmarked by the Bloomberg U.S. MBS Index, Bassman noted. The MTBA ETF can offer them a higher-yielding alternative, in his view.

In addition, while mortgages make up the second largest investment asset class after U.S. Treasuries, “people can’t buy them for a variety of reasons,” Bassman said.

“Everyone knows that mortgage bonds are cheap. Here’s the catch—retail [investors] cannot buy mortgage bonds or they have to buy them in expensive mutual funds or in ETFs that mimic the mortgage index like MBB [iShares MBS ETF]. This is a problem because 72% of all mortgage bonds have coupons between 2.0% and 3.5%. So, when you are buying MBB, or any of the mortgage index products out there, you are buying a 3.0% coupon trading at a price of $80. That’s a silly investment for a lot of reasons.” recently spoke with Bassman about Simplify’s new ETF, investment opportunities in the U.S. mortgage market and what the creators of MTBA hope to achieve with them.

This Q&A has been edited for length, style and clarity. Can you tell us a bit about your background and about Simplify Asset Management?

Harley Bassman: I was on Wall Street for 35 years, 26 years at Merrill Lynch, where at some points I ran the mortgage trading desk and the derivative options trading desk. I joined Simplify close to its launch as employee number nine. The reason why I joined is there was an SEC rule change five years ago where you could legally put derivatives, futures, options and swaps into ETFs, and as a derivative trader, I thought this was genius.

We’ve been building new ETFs where we use derivatives—professional tools only available to Wall Street firms or an IBM pension or BlackRock—and place them into ETFs at a very low cost. This is very unique and almost all of our products have some way of allowing retail [investors] access to professional investment tools at a very low cost. We are kind of cutting out the middleman here. Why did you feel right now is a good time to launch this new ETF that focuses on mortgage-backed securities?

Harley Bassman: If you listen to the press now, you’ll hear the big boys, like BlackRock, all screaming and yelling that mortgage bonds are the cheapest asset out there, which is true. I have a website,, where my two most recent commentaries are about this product. And what it will show you is the spread of mortgage bonds over the 10-year Treasury is at historic spreads. It is as wide now as it was during the financial crisis in 2008 and the COVID crisis in 2020, at about 175 [basis points] over 10-years. It’s insane. Yet we don’t seem to have a crisis right now at all.

Everyone knows that mortgage bonds are cheap. Here’s the catch—retail [investors], civilians as I call them, cannot buy mortgage bonds. They have to buy them in expensive mutual funds or in ETFs that mimic the mortgage index. This is a problem because 72% of all mortgage bonds have coupons between 2.0% and 3.5%. So, when you are buying MBB, or any of the mortgage index products out there, you are buying a 3.0% coupon trading at a price of $80 per share. That’s a silly investment for a lot of reasons.

People buy mortgage bonds to get income. Yet MBB has a distribution yield of only 3.68% because it’s mostly 3.0% mortgage bonds at durations of over seven years. That’s not why you buy these mortgage bonds, you buy them for stability and income.

What I did was go and create an ETF where I only invest in the mortgage bonds issued this year. These are the bonds, like a Fannie 6% mortgage, that actually have a big yield spread over the Treasuries. And, by the way, mortgages are the second largest asset class after U.S. Treasuries. There are $9 trillion of them. Yet people can’t buy them for a variety of reasons.

You can buy my product—I charge a small fee, about 15 basis points, and get basically direct access to a Fannie 6%. There is no leverage, the money goes dollar for dollar into a Fannie 6% mortgage bond.

If rates move, I might buy different bonds. But for now, it’s Fannie 6s. The target monthly distribution will be 25 cents on a $50 price. I just enabled a civilian to buy a mortgage bond that they could not buy before.

I thought of this idea five months ago when mortgages really started widening out from Treasuries. I thought “Someone has thought of this, it’s too obvious.” And no one has. How has the ETF been performing in trading so far?

Harley Bassman: This fund has been trading for seven days. We are already at $85 million and there’s no seed capital, there is no lead investor. It’s all people buying the product. Every day we are trading $100,000 to $400,000 shares as people realize what they are getting.

Now, there’s a caveat and this is important. MBB looks like a Fannie 3% bond with a duration close to seven years. MTBA has a duration close to four years because of the callability feature. If you sell MBB and you go to my product, you do need to know you are shortening the duration and if you don’t want to do that, you need to go buy some longer-term asset.

We actually have small and medium-sized institutions buying our ETF. And they are doing it because the 15-basis-points fee that we charge on this is less than it would cost them to hire someone to trade the bonds themselves and manage the portfolio. I got a phone call from a big institutional client and he said he’s going to buy them because it’s cheaper for him to have us manage the portfolio than hire a person, hire an accountant, all the other stuff involved.

People don’t want to buy a new ETF on day one. They want to see if it trades, see everything else. It’s natural, there’s a process to it. The fact that we’ve been able to do $85 million in seven days is kind of shocking. It surprises me.

We are a small company. We are 24 people. We have almost $3 billion of assets, which is nice, but we are not BlackRock or Vanguard. We don’t have the distribution of other people, it takes time for us to get our story out there. But this is an incredible story. Everyone else out there is offering the mortgage index with a 3.5% distribution. I think you mentioned it took you about five months from the time you came up with the idea to the time that the ETF launched?

Harley Bassman: Yes. Most of that time is SEC time to register it and the waiting period and everything else. Most of the wait time was legal. Can you tell us a bit more about the kinds of mortgage securities MTBA will be targeting?

Harley Bassman: MTBA only buys Fannie Mae securities that are made up of loans to residential homeowners—30-year, fixed-rate loans, [with a] FICO of 730 or higher. It’s guaranteed by Fannie Mae. These are zero credit risk bonds. There is no risk unless the U.S. government defaults. If that happens, we’ve got bigger problems than our ETFs, like World War III going on. You’ve mentioned that in large part MTBA is targeted toward retail investors, some of whom may not understand mortgage-backed securities that well. Can you tell me how are you presenting this opportunity to that group of investors?

Harley Bassman: On my website, I have commentaries I’ve written up about this product. And it explains how the mortgage process works, which is when someone wants to buy a house, they go to a mortgage company to take out a 30-year loan. That mortgage company will make 10,000 loans, go to Fannie Mae, they will look at these bonds and say “Okay, they are all good.” Fannie Mae will put these 10,000 loans into one single mortgage-backed security, they’ll stamp that security with their name and say: “We guarantee this” and give it back to the mortgage company. And the mortgage company will then sell that bond to Wall Street—Goldman Sachs, Merrill Lynch, Morgan Stanley. And that bond will then trade in the market and go to PIMCO, or State of California, or BlackRock, or whoever.

There are $7 trillion 30-year mortgage bonds out there. And they trade with all of the biggest [investors]—the Japanese government buys them, the Chinese government buys them because they are basically U.S. Treasury bonds. They are guaranteed by the U.S. government, with a higher yield. They are very popular. But they’ve not been available to a retail investor. Since you mentioned that there are small and medium-sized institutions investing in MTBA, do you have a breakdown of what percentage of volume is coming from the institutions and what percentage is coming from retail investors?

Harley Bassman: I can’t tell you yet. I will know eventually because on Bloomberg it discloses the holders. That only comes out quarterly, so we’ll know sometime in January or early February who the holders are. Until then I don’t know because the exchange is anonymous. I could tell you we do have institutions buying this, I don’t know how much, I don’t know when they’ve bought it. A big part of our audience are RIAs and wealth advisors who might be looking to get into new types of alternative investment on behalf of their clients. Keeping that in mind, is there anything else about the product that you think is important?

Harley Bassman: What I would tell your audience is this—if you own MBB, which has $26 billion of assets, then you are already in the mortgage market. And all you have to do is look at my product instead and decide what to do.

My initial plan is to get MBB investors to switch into MTBA because I am dealing with people who are already in the mortgage market. The next step, as you describe, is much harder—it’s getting people who have never owned a mortgage security to buy my product. Who would that be? The next group of people who would do it would be people who owned corporate bonds, who have credit risk.

People who own corporate bonds are already people who are taking risk because it’s not Treasuries. Corporate bonds can get squishy during a time of crisis. Mortgage bonds are not as bad. Getting an investor out of corporate bonds into mortgage bonds is not easy to do, but it is doable. Especially right now—the Fed has told you “We have too much inflation, we want to bring it down, we are going to do it by raising interest rates and slowing the economy.” When you raise interest rates, the reason why the economy slows is you are raising the cost of capital, and you are going to create companies going out of business, companies defaulting, or companies firing people to save money. When companies go out of business, they stop paying on their bonds, the bonds default, you lose money. So why would you want to own a corporate bond, which can default, when the Fed has told you it’s going to step on the brakes? You can own a mortgage bond that can’t default.

As a matter of fact, right now, if you look at a desk of 50 investment-grade corporate bonds, they had a yield yesterday of 5.17%. My product yields about 6.0%. You can pick up about 80 basis points to go out of credit risk into mortgage risk, or such as it is.

Now, there is a risk to my product. Mortgage bonds will not trade up much above $105, $106, $107 because what happens is the homeowner has a 6% mortgage, but if it goes to 5%, he’s going to pre-pay the mortgage and get a new mortgage. And that means your mortgage bond will go away. You’ll get your principle back early. That’s the risk you are taking here. You will never lose principle, but you may get it back early.

The question is what is that number worth? For the last decade, the mortgage spread and the corporate bond spread have been about the same at about 65-75 [basis points]. Right now, the corporate bond spread is 65 and the mortgage bond spread is 175. They’ve gone up by a full percent. And that’s why you want to go and do this swap—you want to get out of credit risk into convexity risk, where you may get your money back early. Is that bad? I’ve had worse problems. You are getting paid a very, very pretty penny to take the risk that you get your money back early.

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