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To understand mortgage-backed securities ETF’s, it’s important to first understand what mortgage-backed securities are.

After a mortgage lender has made a number of loans, it takes the value of those loans and bundles it into a security. This security functions similar to a bond and is sold to investors. Investors get a series of bond-life payments over the life of the security, and the original lending company recoups the money lent so that it can lend again.

Mortgage-backed securities ETF’s, then, are those ETF’s that buy into one or more mortgage-backed securities. The price of the ETF then reflects the net asset value of the securities which the ETF bought into.