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General Mortgage ETFs
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About General Mortgage ETFs |
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General Mortgage ETFs Overview and forecast
The recent history of US mortgage securities includes one of the most unheard- of crashes in a class of investment, ever. Nothing like it had ever been seen in modern times, and mortgage securities were given almost exclusive blame for the credit crunch and the following crash. General Mortgage ETFs show a massive dive in prices, in the onset of the crash, in some cases vertical dives of up to 40% of their value.
Less well known is the fact that the General Mortgage ETFs also recovered very rapidly, returning in some of those cases to the prices from which they fell, and remaining relatively steady in the bandwidth. This apparent contradiction, where mortgage securities were the villains of a global meltdown, yet remained comparatively strong, reflects the nature of the market.
The real problem with these securities was who was holding what. Some mortgage securities have since been identified as wholesale fraud, and their valuations were in many cases worse than pathetic. The FBI is currently investigating that issue. The core market, however, of genuine mortgage instruments, wasn't in that class. It's a distinction between who had the Plague and who didn't.
So the apparently good health of the General Mortgage ETFs isn't a real contradiction. A lot of these securities were based on the housing boom market, and if the housing market is now stagnant, with odd bursts of what seems to be life, the General Mortgage ETFs have capitalized on quality. Many of the funds operate on rated securities, and that's kept them largely out of the danger zone.
Short term (6 months)
The mortgage securities ETFs have charts which look exactly like a seismograph of recent US market moves. Big peaks and troughs, and volumes are quite variable, depending on which ETF you study. Some are comparatively stable, even close to their inception prices. Others have moved strongly, up and down. As you can see from our chart, the short term has been generating relatively modest moves.
From a trading perspective, these ETFs move in bands of about 3 months. The second quarter of 2009 has shown some decent moves, but in trading terms the General Mortgage ETFs are quite slow movers. Despite that, the 3 month band does show good percentiles. Those who invest on a quarterly basis could have done worse. They're a mixed bag, and some trade well on low volumes, with meaningful margins in a few days. It's obvious that the General Mortgage ETFs do have some trading potential, but their moves aren't usually dramatic.
Medium term (2 years)
The fundamental strength of the General Mortgage ETFs, as well as the original selling point of the mortgage securities industry, is the fact that the housing market is going to revive, perhaps sooner rather than later, as demand increases. There are issues with mortgage values and returns, obviously, in a depressed price environment, but the volume will pick up, and over time the machinery will begin to work normally again.
In all fairness to this class of ETFs, recent events have been quite atypical, and not in the market's interest. All mortgage securities have been tarred with the same brush, and that's just not a correct assessment. The current low- median returns aren't a good indication of what they can do in a healthy market. There is genuine upside, but this market isn't for the squeamish, because it is naturally volatile, and will remain so for a while. The medium term outlook is fundamentally positive, with a caveat on individual fund performance, which can be quite variable, with occasionally drastic price moves. Investors must study any of the General Mortgage ETFs before moving.
Long term (5 years)
This type of debt security is part and parcel of the investment market, and until the meltdown, was a perfectly respectable class of investment, for institutional and corporate investors. General Mortgage ETFs were in fact relatively staid and stable investments, doing quite well in gradual increases in prices, until the crash.
However- This is a new investment environment. The market has its own ideas about how debt securities and similar investments should perform, and it's likely that some serious competition will emerge. The broad pattern with the ETF market is that new funds are being created even during the downturn, and this potentially highly lucrative investment market can expect to see incoming funds and new opportunities. It's also likely that active management and new structures will arise, as the General Mortgage ETFs remodel themselves. The long term will definitely be interesting.
Qualifiers to projections
The weak spot with the General Mortgage ETFs is that they're not great traders, and that they're in arguably the most unfashionable area of investment on Earth. That's not helping unit prices, and it's not attracting the sort of capital these ETFs need to go to the next level. You can expect the word Makeover to become quite common in the ETF universe, and the General Mortgage ETFs are the classic case where market image has to improve drastically, and the industry needs to protect itself from the negative perceptions.
There's nothing actually wrong with the mortgage security concept, or its normal performance as a class of investment. Mortgage securities were standard practice, for years, with no major problems except the bizarre global housing prices inflating the mortgages. The stigma of the past, however, will have investor shuddering for decades to come, and that will take some living down. Miracles of investment returns need not be expected for a while, but the General Mortgage ETFs will prosper, in a healthy market.
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Last Updated on: 2010-01-14 02:03:40 |
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