Pools of mortgages are the collateral behind mortgage-backed securities -- MBS. Mortgage-backed securities are a major component of the bond market and many bond funds will have a portion of holdings in MBS. There are also funds, of all fund types, that only invest in mortgage pool securities.
Types of Mortgage-Backed Securities
The primary type of mortgage securities are derived from pools of mortgages guaranteed by one of the implied or explicit government mortgage agencies. The MBS are known by the agency names including Ginnie Mae, Fannie Mae and Freddie Mac. Most agency MBS are set up as pass-through securities, which means that as homeowners with mortgages in the pool backing an MBS make principal and interest payments, both principal and interest are paid out to MBS investors.
MBS Focused Funds
There are both mutual funds and exchange-traded funds -- ETFs -- that primarily invest in mortgage-backed securities. These funds will often have the terms MBS or mortgage-backed securities included in the name, but there are funds that primarily invest in MBS and do not indicate so in the name. The finance and investment related websites regularly publish top funds by category and these lists would be a good place to start research into mortgage focused bond funds.
Other Bond Funds
Taxable bond funds of all types might own MBS. Since agency MBS have implicit or implied U.S. government backing, bond funds billed as government bond funds often own a significant amount of mortgage securities. Total return bond funds may own mortgage securities if the values are attractive compared to other types of taxable bonds. A fund will list its top holdings on its web pages and if those holdings include GNMA, FNMA and FMAC bonds, the fund invests in mortgage pool securities.
Agency Mortgage REITS
An alternate way to invest in mortgage pools is with mortgage real estate investment trusts -- REITs. Mortgage REITs own leveraged pools of mortgage securities. The leverage allows these companies to pay significantly higher dividend yields than MBS mutual funds or ETFs. REIT shares trade on the stock exchanges and can be bought and sold like any stock or ETF. Some mortgage REITs exclusively own agency MBS and others hold a combination of agency and MBS from non-agency mortgage pools.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.