Decoding VABS: How a Securitized Debt ETF Outperforms in a Rising Rate World

In a market where traditional bonds struggle to keep pace with inflation and rising interest rates, the Virtus Newfleet ABS/MBS ETF (VABS) has emerged as a compelling alternative for income-focused investors. Over the past year, VABS has delivered a 6.60% dividend yield, significantly outpacing the 4.38% yield of the 10-year U.S. Treasury as of July 2025. This performance underscores the growing appeal of securitized debt strategies in an environment where conventional fixed-income assets are losing ground.

A Dividend Powerhouse with Tactical Flexibility

VABS's recent dividend history reveals a disciplined approach to income generation. Between January and July 2025, the ETF declared monthly dividends ranging from $0.032 to $0.200 per share, with an annualized payout of $0.608 as of July 18. While the amounts fluctuate, the consistency of monthly distributions—a rarity in the ETF space—provides investors with predictable cash flow. For example, in September 2024, VABS paid a hefty $0.200 dividend, reflecting strong performance in its underlying asset-backed securities (ABS) and mortgage-backed securities (MBS) holdings.

Critically, VABS's yield is supported by its short-duration strategy (1–3 years), which reduces sensitivity to interest rate hikes. Unlike long-duration Treasuries or corporate bonds, which see sharp price declines when rates rise, VABS's portfolio is structured to roll over quickly, capturing higher yields as market conditions shift. This dynamic was evident in Q4 2024, when the ETF's average portfolio duration rose to 4.93 years but remained below the 5.07-year average of March 2023—a testament to its active management in balancing yield and risk.

Yield vs. Risk: VABS vs. Traditional Bonds

To understand VABS's edge, consider the current yield landscape:
- 10-year Treasury yield: 4.38% (July 2025)
- Moody's Aaa corporate bond yield: 5.52%
- US Corporate A Effective Yield: 4.99%

VABS's 6.60% yield not only surpasses these benchmarks but does so with a risk profile tailored to a rising rate environment. Traditional bonds, particularly long-duration Treasuries, face negative convexity—their prices fall more sharply as rates rise. Meanwhile, VABS's focus on investment-grade securitized debt, with rigorous credit analysis and sector rotation, mitigates this risk. For instance, its top holdings in Q4 2024 included high-quality tranches like COOPR 2025-CES1 A1A and ROCC 2024-CNTR A, which offer stable cash flows with minimal prepayment risk.

The Prepayment Paradox and VABS's Active Edge

A common challenge for MBS-heavy portfolios is prepayment risk—the likelihood that borrowers will refinance mortgages when rates drop, shortening the bond's duration and reducing yield. However, in 2024's high-rate environment, prepayment activity slowed, allowing VABS to extend durations strategically without sacrificing income. The fund's management team, led by CFA David Albrycht, has excelled at navigating this paradox. By focusing on non-agency ABS and commercial MBS, VABS accesses sectors where prepayment behavior is less volatile and spreads are wider.

For example, in Q4 2024, VABS allocated 45% of new purchases to MBS/CMO/SBA, a mix that balances yield with structural protections against prepayments. This contrasts with traditional bond portfolios, where 48% of new purchases went to Treasuries/agency securities—assets with lower yields but higher liquidity.

A Case for Active Management in a Passive World

VABS's 0.39% expense ratio, while higher than passive bond ETFs, is justified by its active approach. The fund's managers actively rotate sectors, adjust credit exposure, and exploit inefficiencies in the securitized debt market—strategies that have proven valuable in 2024's unpredictable rate environment. This contrasts with traditional bond indices, which are inherently passive and slow to adapt to shifting market dynamics.

For investors, the lesson is clear: in a world where rates are unlikely to fall anytime soon, income strategies must prioritize flexibility and yield durability. VABS's ability to maintain a 6.60% yield while managing duration and credit risk makes it a standout option.

Final Take: A Rising Rate Haven

While the Federal Reserve's rate hikes have battered traditional bond markets, VABS has demonstrated resilience. Its securitized debt strategy, combined with active management and a short-duration focus, positions it as a robust alternative for investors seeking income without sacrificing capital preservation. For those wary of long-duration Treasuries or underperforming corporate bonds, VABS offers a compelling case: high yield, low duration, and active risk management.

As the Fed's policy trajectory remains uncertain, the ability to pivot quickly—and profitably—will separate winners from losers. VABS, with its proven track record in rising rate cycles, is well-positioned to deliver just that.