Mortgage-backed ETFs gain traction amid yield search

Investors are increasingly turning to active fixed income ETFs as they look for yield and flexibility amid interest rate uncertainty. Strategies focused on mortgage-backed securities and shorter durations are seeing growing demand.

BNN Bloomberg spoke with Frank Ros, senior market strategist at Angel Oak, about how investors are repositioning portfolios, highlighting rising interest in securitized credit and active ETF strategies.

Key Takeaways

• Investors are shifting toward active fixed income ETFs to access more flexible strategies not widely available in passive products.
• Mortgage-backed securities are attracting demand due to higher yields and opportunities in both agency and non-agency markets.
• Shorter-duration bond strategies are being used to balance yield and interest rate risk within core portfolios.
• ETF flows are moving away from floating-rate and high-yield credit into higher-quality, intermediate-duration exposures.
• Volatility in interest rates is creating opportunities for active managers to deploy capital at more attractive entry points.

Read the full transcript below:

LINDSAY: Okay, now it’s time for the ETF report. Our next guest makes a case for an ETF in the fixed-income space. Let’s find out why. Joining us is Frank Ros, senior market strategist at Angel Oak. It’s good to have you with us. Thanks so much.

FRANK: Good morning.

LINDSAY: Let’s start there — why an ETF in the fixed-income space?

FRANK: About four years ago, we realized there was a gap in the market. If investors wanted sophisticated asset classes, they had to go to a mutual fund or a hedge fund. There wasn’t something they could access in an active ETF wrapper. So we set about creating and converting several funds. We now have five across most major taxable fixed-income categories to give investors that access.

LINDSAY: Let’s go through some of the ETFs you like. One of your funds is called the Angel Oak Income ETF. The ticker symbol is CARY. Tell us about that fund.

FRANK: The CARY Income ETF identified a gap in most investors’ portfolios. They had 40 to 60 per cent in core or investment-grade corporate portfolios that tended to be seven to nine years in duration, with moderate income and high credit quality. Then, over the last 15 years, the risk bucket shifted from high yield to illiquid alternatives like hedge funds, private credit and private equity. There was a gap in the middle where a total-return strategy with a lower duration profile — specifically zero to five years by mandate — was needed, and CARY has done a great job of filling that gap. Every month since inception, we’ve distributed around six per cent net of fees, and each year we’ve added one to three per cent of price appreciation on top of that. It effectively gives investors a total-return strategy with a shorter duration profile in U.S. credit.

LINDSAY: You also have an ETF called the Angel Oak Mortgage-Backed Securities ETF. The ticker symbol is MBS. What do you like about that one?

FRANK: First, the ticker symbol — we got very lucky with that name, having a mortgage-backed fund with the ticker MBS. That said, there was also a gap in this market where most mortgage ETFs were passive, or quasi-active. What I mean is they were typically allocating to the agency space. They were controlling for coupon and duration, but they were missing a broad swath of the market. Our MBS ETF not only controls for coupon and duration, but also allocates to the non-agency space, which is a market most investors seem to ignore. It’s more than a trillion dollars in size, and these are borrowers paying seven to nine per cent on their mortgages, but they’ve been left out of conforming guidelines in the post-Dodd-Frank, post-financial-crisis world. With agency mortgages, you’re getting a spread above corporates right now, but with non-agency, you’re getting a spread above agency — it’s spread on spread. The MBS ETF gives investors all of that in an active ETF wrapper.

LINDSAY: We’re also watching the Federal Reserve’s rate decision this week. You say you’re constructive on interest rates. Why is that?

FRANK: We don’t think the Fed will do anything at this point, and it will probably continue to hold rates steady for the next several meetings. We like buying at these levels. We went from under four to above 4.3 per cent, and we’re back down to about 4.2 per cent now. When that type of rate volatility happens, active management gives us an opportunity to buy at a discount. So we appreciate the volatility it has created, and we are buyers at these levels.

LINDSAY: How sensitive are ETFs to rates? If there were a change, how would that affect flows?

FRANK: The MBS ETF is around a five-and-a-half- to six-year duration, and that is actively managed. The CARY ETF is very active within that zero- to five-year range. We were as low as two years several years ago when the Fed was finishing its rate-hiking cycle. Today, we’re around 4.05 years because we think the likelihood of rates going lower over the next six to 12 months is higher than the likelihood of them increasing.

LINDSAY: Are you noticing rotations in and out of certain ETF styles right now?

FRANK: You’ve definitely seen flows out of traditional high-yield corporate credit, senior loan funds and CLO funds. That’s partly because the rising-rate trade — the floater trade — has come to an end. We think the market was a bit late to respond, and those flows came later than we would have anticipated. Now you’re seeing institutional and ultra-high-net-worth investors migrate more into the middle of the curve, with moderate duration and higher credit quality ETFs.

LINDSAY: Why is that?

FRANK: One reason is that investors can increase yield while dampening volatility by buying two- to four-year duration products. With floating-rate or CLO strategies, spread volatility remains, but you don’t have the same ability to offset that through interest rate sensitivity during periods of credit stress.

LINDSAY: Interesting stuff. We’ll leave it there. Frank Ros, senior market strategist at Angel Oak, thanks for your time today.

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This BNN Bloomberg summary and transcript of the March 17, 2026 interview with Frank Ros are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.