Comparing JMBS and VMBS: A Value Investor's Look at Monthly Income for Retirees

For retirees seeking a reliable monthly cash flow, the Janus Henderson Mortgage-Backed Securities ETF (JMBS) and the Vanguard Mortgage-Backed Securities ETF (VMBS) present two distinct paths. Both are built on the same foundation: pools of residential mortgages, primarily backed by government-sponsored enterprises like Fannie Mae and Freddie Mac. This agency backing provides a high degree of credit safety, as the U.S. government effectively guarantees the principal and interest payments. The income streams for both funds flow directly from the monthly mortgage payments made by homeowners, creating a predictable source of dividends that retirees can count on.

The core difference lies in their approach and cost. VMBS takes a passive, low-cost stance, tracking a broad index of agency MBS with a 0.03% expense ratio. Its current yield is 3.96%. JMBS, by contrast, is actively managed. Its portfolio includes both agency and investment-grade mortgage-backed securities, and its team uses specialized expertise to select holdings. This active strategy commands a higher fee, with a 0.22% expense ratio, but it delivers a significantly higher yield of 5.04%.

This sets up a clear trade-off. JMBS's yield is approximately 28% higher than VMBS's, while its expense ratio is about seven times greater. For a value investor, this is the central question: does the active manager's skill and the higher yield generate enough incremental total return to justify the extra cost over the long term? The evidence shows JMBS has delivered strong performance, outperforming the broad bond market over a five-year period. Yet the cost of that outperformance is a direct drag on returns. The analysis now turns to whether the higher yield is sustainable and if the active management premium is well spent.

Assessing the Competitive Moat: Durability of the Income Stream

For a value investor, the durability of an income stream is paramount. It's not just about the headline yield today, but about the quality of the underlying assets and their ability to generate cash flow through market cycles. Here, the moats of JMBS and VMBS diverge in both strength and composition.

VMBS's moat is built on simplicity and scale. Its portfolio is composed entirely of agency MBS, securities backed by Fannie Mae and Freddie Mac. This creates a powerful credit and liquidity advantage. The implicit guarantee from the U.S. government means the risk of default on the underlying mortgages is negligible. This foundation provides a wide, durable moat for the income stream, as the cash flows are exceptionally predictable and safe. The fund's rock-bottom expense ratio of 0.03% further fortifies this moat by ensuring nearly all of the generated income flows to shareholders.

JMBS's moat is more complex. While it also holds agency MBS, its active strategy includes investment-grade MBS. This introduces a layer of credit risk and prepayment sensitivity not present in VMBS. The fund's higher yield of 5.04% is the market's compensation for this added complexity. Yet, the fund's management team is positioned to navigate this terrain, with a focus on security selection and a demonstrated ability to maintain stable monthly distributions. The moat here is narrower but potentially deeper, relying on the manager's skill to identify and hold securities that offer a superior risk-adjusted return.

The most significant shared vulnerability for both funds is interest rate sensitivity. When rates fall, homeowners have a strong incentive to refinance, accelerating the prepayment of mortgages. This reduces the effective yield of the portfolio over time, as cash is returned to investors at lower rates. The evidence notes that rising refinancing activity from falling rates could reduce income. This is a fundamental structural risk for any mortgage-backed security fund. Conversely, rising rates can temporarily pressure the fund's net asset value, though they may eventually boost future yields.

The bottom line is that VMBS offers a wider, safer moat anchored in government-backed securities and ultra-low costs. JMBS trades some of that safety and simplicity for the potential of higher income, banking on active management to deliver. For a retiree prioritizing capital preservation above all, VMBS's moat is the more compelling. For one willing to accept a bit more complexity and credit risk in exchange for a higher yield, JMBS's moat is narrower but potentially more rewarding. Both must contend with the same rate-driven prepayment risk, which is the ultimate test of their income durability.

Margin of Safety: Costs, Volatility, and Long-Term Compounding

For a value investor, the ultimate test is whether the purchase price offers a sufficient margin of safety to protect capital and allow for long-term compounding. This means looking past the headline yield to the net return after all costs and risks. The stark difference in expense ratios between these two funds sets up a classic trade-off between cost and yield.

VMBS's rock-bottom 0.03% expense ratio is a powerful force for compounding. Over decades, even a small cost advantage compounds into a significant drag on total returns for a higher-fee alternative. This low cost is a wide moat in itself, ensuring that nearly all of the fund's generated income flows to shareholders. The fund's primary vulnerability is interest rate sensitivity, which can pressure its net asset value during rate hikes. Yet, its passive, low-cost structure provides a clear path to preserving capital through volatility.

JMBS's higher 0.22% expense ratio directly offsets its higher yield. The fund's 5.04% yield is designed to compensate investors for this cost and the added complexity of its active, investment-grade holdings. The evidence shows the manager has delivered on this promise, with the fund outperforming the broad bond market over a five-year period. This suggests the active premium may be well spent. However, the higher cost is a permanent drag on net returns, and the fund's NAV can be more volatile during rate hikes due to its broader portfolio.

A closer look at the distribution history reveals another layer of sensitivity. While JMBS has maintained an unbroken payment history since its 2018 inception, the monthly payments have fluctuated. Data shows the distribution per share has ranged from $0.1256300 in early 2023 to $0.2102100 in June 2025. This variability, even within a stable trend, indicates the income stream is more sensitive to underlying mortgage cash flows than a purely agency-backed fund. It's a trade-off: the potential for higher income comes with a bit more noise in the monthly payout.

The bottom line is one of balance. VMBS offers a wider margin of safety through ultra-low costs and a simpler, government-backed portfolio. Its path to compounding is straightforward and efficient. JMBS offers a narrower but potentially deeper moat, banking on active management to generate excess returns that justify its higher fee. For a retiree with a long time horizon, the compounding power of VMBS's low cost is a formidable advantage. Yet, if the active manager consistently delivers the promised outperformance, JMBS's higher yield could ultimately provide a larger total return. The choice hinges on whether the investor believes the active premium is sustainable and worth the added cost and volatility.

Catalysts and Watchpoints for the Retiree Investor

For the retiree investor, the choice between JMBS and VMBS is not a one-time decision but a commitment to a specific set of future conditions. The primary catalyst will be the direction of interest rates, which acts as a powerful force on both funds' income streams. If rates fall significantly, the resulting surge in refinancing activity will accelerate prepayments, reducing the effective yield of the underlying mortgage pools. This is a structural headwind that will pressure the monthly distributions of both funds, though it may hit JMBS more acutely due to its broader portfolio. Conversely, if rates rise, the funds' net asset values may face temporary pressure, but higher yields would eventually benefit future income. The current environment, with mortgage rates elevated, provides a period of low prepayment risk and stable cash flows, a key reason for the fund's resilience.

Beyond rates, the sustainability of the high yield is the critical watchpoint. For JMBS, this means monitoring the fund's distribution coverage ratio and the quality of its investment-grade holdings. The fund's ability to maintain its $0.20 per share monthly distribution through varying cycles is a testament to its management, but the recent volatility in payments-from $0.1256300 in early 2023 to $0.2102100 in June 2025-shows the income stream is sensitive to underlying mortgage cash flows. Investors must assess whether the active manager's security selection continues to generate sufficient income to cover the distribution and support the fund's 0.22% expense ratio.

The broader economic cycle and housing market will be the ultimate test. A strong economy with rising home prices can support mortgage performance and limit defaults, while a downturn could increase delinquencies and force the fund to take losses. The fund's reliance on agency-backed securities provides a buffer, but the inclusion of investment-grade MBS introduces a layer of credit risk that must be managed. For VMBS, the watchpoint is simpler: its rock-bottom cost and passive structure mean it will benefit from any market rally, but it offers no buffer against a sharp decline in mortgage-backed security values.

The bottom line is that both funds are exposed to the same fundamental interest rate risk, but they are positioned differently for the next cycle. VMBS offers a simpler, lower-cost path that will likely outperform in a rising rate environment due to its cost efficiency. JMBS offers a higher yield that must be justified by active management skill in navigating prepayment and credit risks. For the retiree, the key is to understand which catalysts align with their personal risk tolerance and time horizon.