Benjamin Franklin said, “It would be thought a hard government that should tax its people one-tenth part of their income.” Yet recent polls show that the majority of U.S. citizens do not believe candidate Romney’s 2011 effective rate of 14.4% was high enough. Apparently, not everyone seems to feel that one-tenth, or 10%, is harsh at all.
More famously, Mr. Franklin quipped, “In this world nothing can be said to be certain, except death and taxes.” Indeed, Franklin would be surprised to discover that nearly half of United States citizens pay zero federal income tax.
Taxes certain? Far from it. For instance, we may or may not witness a bevy of tax increases (a.k.a. the fiscal cliff) at the end of 2012. Moreover, it is incredibly unclear who will pay more, and how much more.
That said, there is one certainty involving financial matters. Ben Bernanke is guaranteeing that the Federal Reserve will buy $40 billion of mortgage-backed bonds every month. It is an open-ended promise… meaning it has no foreseeable expiration… other than tangible improvements in the labor market and the economy as a whole.
Now, short of the federal government aligning itself with the natural gas industry, there isn’t going to be a significant increase in the labor participation rate; unemployment and underemployment will still weigh on corporate profits. And stock assets will see a great deal of choppiness going forward.
Should you buy the dips? You can… if you use one or more methods of protecting your downside risk.
But what if you want a Ben Franklin-like certainty in your portfolio? Then buy what Ben Bernanke is buying, mortgage-backed bonds. The easiest way to access them is with an ETF like iShares Barclays MBS Bond (MBB). Not only is there a 3.1% annual yield, but the Fed purchases (i.e., demand) should strain supply if the program continues beyond 12 months. In other words, expect some price appreciation as well.
There are several other ways to benefit from the bond buying bonanza. Vanguard also buys¬†agency mortgage-backed securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Vanguard Mortgage-Back Securities ETF (VMBS) even has a lower expense ratio than MBB (0.26%) at 0.15%.
The active PIMCO Total Return ETF (BOND) has a large helping of mortgage-backed securities in its portfolio. This exchange-traded tracker has been a monster fan “fave” since its inception.