FlexShares DEZM: A Steady Income Play Amid Rate Volatility?

The Federal Reserve's "higher for longer" stance has left income investors scrambling for reliable yields in an environment where Treasury bonds and cash offer paltry returns. Enter the FlexShares Disciplined Duration MBS Index Fund (DEZM), a mortgage-backed securities (MBS) ETF that has quietly delivered consistent monthly distributions while navigating interest rate swings. Here's why this fund could be a shrewd addition to your portfolio—and why its sustainability is worth watching closely.

The Dividend Machine: Is DEZM's Income Stream Sustainable?

DEZM's dividend history paints a picture of stability. Over the past 18 months, the fund has paid monthly distributions averaging $0.065 per share, with yields hovering between 0.3% and 0.63% (annualized to 3.99% as of June 2025). While this may seem modest, the consistency is striking. Even during periods of bond market turbulence—such as early 2024 when MBS prices dipped—the fund's payouts held firm.

The secret? Its rigid duration constraint of 3.25–4.25 years. Unlike longer-duration bond funds that get slammed when rates rise, DEZM's intermediate exposure limits volatility. The fund tracks the ICE BofA Constrained Duration US MBS Index, which excludes riskier MBS types and focuses on high-liquidity agency-backed securities. This structure ensures the fund's income stream is underpinned by steady prepayments and coupon payments.

Why DEZM Shines in the Current Rate Environment

The Fed's federal funds rate has been stuck in a narrow 4.25%-4.50% range since May 2025, with policymakers in “wait-and-see” mode over inflation and trade policy. This stalemate is a gift for MBS investors:

1. Yield Advantage Over Treasuries: DEZM's 3.99% yield trounces the 10-year Treasury's 4.09%—almost. The spread is tight, but MBS typically offer a premium over Treasuries for similar duration risk. With the Fed unlikely to hike further, this edge could widen.
2. Duration Discipline: Its capped duration means DEZM won't suffer the same pain as long-dated bond funds if rates spike. Meanwhile, its intermediate maturity positions it to benefit if the Fed eventually eases.
3. Inflation Hedge: MBS cash flows are tied to homeowners' prepayments, which accelerate during inflation. While this creates “reinvestment risk,” it also ensures the fund's income stream keeps pace with rising prices.

The Risks: Don't Ignore Prepayment or Credit Headwinds

No income fund is without pitfalls. DEZM's two biggest risks:

• Prepayment Risk: If housing markets stabilize and homeowners refinance en masse, DEZM's MBS could be paid off early, forcing the fund to reinvest proceeds at lower rates. This could crimp future dividends.
• Credit Concerns: While agency MBS are backed by Fannie Mae, Freddie Mac, and Ginnie Mae, the latter's explicit U.S. government guarantee is a safer bet. Investors should monitor housing affordability trends and default rates.

The Bottom Line: A Dividend-Paying Hedge Against Rate Uncertainty

DEZM isn't a get-rich-quick scheme. But in an era where the Fed's next move is anyone's guess, its monthly payouts and duration discipline make it a compelling income anchor. With yields still above cash and volatility in stocks and crypto markets, this fund offers a rare mix of stability and yield.

Act Now:
- Buy for Income: DEZM's yield, while not sky-high, is reliable in a choppy market.
- Diversify Your Bond Exposure: Pair it with short-term Treasuries or TIPS to balance interest rate risk.
- Monitor Prepayment Metrics: If refinancing activity surges, consider trimming exposure.

In a world where certainty is scarce, DEZM offers a disciplined approach to earning income—no matter which way rates turn.