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New Mortgage ETF Buys Stocks, Not Bonds
By Murray Coleman | April 30, 2009

Related ETFs: MBB / MBG

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Anticipating a return in U.S. mortgage markets, State Street Global Advisors launched Thursday an exchange-traded fund focusing on companies involved in that corner of the market.

The SPDRKBW Mortgage Finance ETF (NYSE Arca: KME) takes a different approach than other financial-focused funds on the market. It holds banks dominated with mortgage loans on their books as well as related service providers. The biggest of those names in the fund's index heading into the launch were Hudson City Bancorp, New York Community Bancorp and NewAlliance Bancshares.

But the new ETF also includes a healthy dose of title insurers and claims managers such as Fidelity National and Lender Processing.

If that isn't diversified enough, home builders also are well-represented in the index with stocks from D.R. Horton, Centex and Lennar, to name just a few.

Name	Ticker	1-Mnth (%)*	YTD (%)*	12-Mnth (%)*	Weight (%)*
Hudson City Banc	HCBK	8.6	-18.4	-31.4	7.66
NY Community Banc	NYB	4.4	1.60	-32.4	7.52
D.R. Horton	DHI	110.70	83.60	-21.00	7.00
Fidelity National	FNF	-3.30	2.90	18.70	6.72
Lender Processing	LPS	-1.00	2.60	--------	4.73
NewAlliance Banc	NAL	14.30	2.70	2.50	4.57
Centex	CTX	24.30	6.80	-48.60	4.50
PHH Corp.	PHH	21.80	34.40	-12.40	4.47
MDC Holdings	MDC	4.60	15.40	-20.80	4.46
Lennar	LEN	-1.90	16.80	-14.80	4.29
Vanguard SC Value	VBR	10.00	-1.25	-31.83	----
iShares Russ 2000	IWM	8.23	-0.21	-30.57	----
iShrs MC Russ Val	IWS	7.09	-1.27	-37.17	-----
SPDRs MidCap	MDY	9.24	4.90	-32.42	------

Sources: KBW, SSgA, NYSE, Morningstar *Through April 29, 2009

The ETF, which comes with an expense ratio of 0.35%, uses a benchmark created by investment banker and asset manager Keefe, Bruyette & Woods. The new ETF joins four other SPDRs using KBW indexes to slice financials into different subsectors.

There are several ETFs that invest in mortgage-backed securities, including the iShares Barclays MBS Bond Fund (NYSE: MBB). The SPDR Barclays Capital Mortgage Backed Bond ETF (NYSE: MBG) also competes in that area of the fixed-income market. PowerShares has also filed to come out with a pair of actively managed MBS-focused ETFs. Those would buy securities backed by prime and Alt-A mortgages.

SPDRs ETFs	Ticker	1-Month*	YTD*	12-Month*
Banks Sector	KBE	14.39%	-23.70%	-58.03%
Regional Banks	KRE	9.95%	-25.40%	-35.93%
Insurance Sector	KIE	17.09%	-10.56%	-48.57%
Capital Markets	KCE	10.70%	10.96%	-46.67%

Source: KBW *Through April 29, 2009

But until now, none has ventured into investing solely in stocks of mortgage lenders and related services firms. And there's good reason. Longer-term returns haven't been so hot for the group compared to other subsectors in the broader financial sector (see table below).