The Janus Henderson Mortgage-Backed Securities (JMBS) Exchange Traded Fund delivered a strong performance in the third quarter of 2025, surpassing its benchmark. This success was primarily attributed to astute asset allocation and meticulous security selection within both agency and non-agency mortgage-backed securities. The broader economic landscape, characterized by the Federal Reserve's initial interest rate reduction since December 2024 and a slowdown in labor demand, created a favorable environment for fixed-income assets.
Key factors influencing the positive returns included tightening spreads and a decline in Treasury yields. These conditions, combined with a normalization of interest rate volatility and a further steepening of the yield curve, are anticipated to continue driving favorable excess returns for the MBS sector. While the overall MBS asset class appears well-positioned for robust performance, it's important to recognize the significant variations in potential returns across different mortgage pools. In an environment marked by heightened macroeconomic uncertainty, a flexible approach to asset allocation and precise security selection are vital tools for achieving consistent performance.
The strategic decisions made by the fund managers, particularly in navigating the complexities of the mortgage market, played a crucial role. Their ability to identify opportunities within specific segments of the MBS market allowed the fund to capitalize on the prevailing market dynamics. This proactive management style is essential, especially when market conditions are fluid and unpredictable. The focus on mitigating prepayment risk by prioritizing specified mortgage pools over more volatile, recently issued TBA securities with higher coupons, exemplifies a cautious yet effective approach to generating attractive yields while managing downside risks.
Looking ahead, the prospect of ongoing Federal Reserve rate cuts, a further steepening of the yield curve, and a reduction in interest rate volatility are expected to provide a supportive backdrop for agency MBS. These macroeconomic trends are likely to enhance the attractiveness of these securities, potentially leading to continued strong returns. However, the importance of detailed analysis and agile portfolio adjustments cannot be overstated. Investors will need to remain vigilant and adaptable to capitalize on emerging opportunities and navigate potential challenges.
The fund's outperformance underscores the value of active management and a nuanced understanding of the mortgage-backed securities market. By strategically positioning the portfolio and selecting securities with an eye toward both return potential and risk mitigation, the fund has demonstrated its capacity to thrive even amid a complex economic environment. This approach is fundamental to achieving long-term financial objectives for clients.