Monthly Income Generation Through Canadian MBS ETFs: Assessing ZMBS.TO's Yield and Reliability in a Low-Yield Era

In an era where traditional fixed-income assets struggle to deliver meaningful returns, investors are increasingly turning to alternative income strategies. The BMO Canadian MBS Index ETF (ZMBS.TO) has emerged as a compelling option for those seeking monthly income with a balance of yield and stability. This article examines how ZMBS's CAD 0.06 per unit dividend, its underlying asset composition, and its market positioning make it a strategic choice for income-focused investors navigating a low-yield environment.

The Case for Mortgage-Backed Securities in a Low-Yield World

Canadian government bond yields, while modestly higher in 2025, remain historically low. For instance, the 10-year Government of Canada bond yield hovers around 3.44%, while 5-year bonds yield just 2.96%. Corporate bonds, though slightly more attractive, offer yields that still fall short of inflation-adjusted returns. Meanwhile, guaranteed investment certificates (GICs) provide fixed rates but lack the growth potential of market-linked instruments.

In this context, mortgage-backed securities (MBS) offer a unique value proposition. ZMBS.TO, which tracks the FTSE Canada NHA MBS 975 Index, provides exposure to a diversified basket of Canadian residential MBS. These securities derive income from mortgage payments, which are less sensitive to interest rate volatility than corporate bonds. The ETF's recent CAD 0.06 monthly dividend—equating to a 1.57% forward yield—reflects the steady cash flows from its underlying assets, which include both government-guaranteed and private-label MBS.

ZMBS.TO's Dividend Stability and Asset Composition

ZMBS's dividend consistency is a key draw. In 2025, the ETF has maintained a monthly payout of CAD 0.06, with a record of distributions on April 29, March 28, February 27, and January 30. While historical data shows a negative average dividend growth rate of -3.82% over three years, the 2025 trend has stabilized, with no significant declines. This stability is underpinned by the ETF's portfolio structure: a mix of MBS with varying maturities, including holdings maturing as far out as 2030.

The ETF's exposure to Canadian mortgage pools with yields ranging from 0.01% to 4.10% ensures a diversified income stream. Top holdings include MBS with 3.84% and 4.04% interest rates, maturing in 2028 and 2029, respectively. This maturity ladder helps mitigate interest rate risk, as shorter-term securities can be reinvested at current rates while longer-term assets provide consistent cash flows.

Strategic Appeal for Income Investors

ZMBS's appeal lies in its ability to bridge the gap between traditional fixed income and equity-based dividend strategies. Unlike bonds, which face duration risk in a rising rate environment, MBS are less volatile due to their prepayment risk characteristics. When rates rise, homeowners are less likely to refinance, preserving the cash flows of MBS. Conversely, in a falling rate environment, prepayments may increase, but ZMBS's diversified maturity profile cushions this risk.

For investors seeking alternatives to high-yield corporate bonds or covered call ETFs, ZMBS offers a middle ground. Its 1.57% yield may appear modest compared to the 6.22% offered by the BMO Covered Call Canadian Banks ETF (ZWB), but it comes with lower volatility and a more predictable income stream. Moreover, ZMBS's expense ratio of 0.17% is competitive with broader fixed-income ETFs, making it a cost-effective option for long-term income portfolios.

Risks and Considerations

While ZMBS presents a compelling case, investors must weigh its risks. MBS are sensitive to interest rate changes and housing market dynamics. A surge in mortgage defaults, though unlikely in Canada's currently stable housing market, could impact the ETF's performance. Additionally, ZMBS is not guaranteed, and its value can fluctuate with market conditions.

For conservative investors, ZMBS should complement—not replace—core fixed-income holdings. Pairing it with short-duration government bonds or high-quality corporate bonds can create a balanced income portfolio. Those in higher tax brackets may also benefit from ZMBS's tax-efficient structure, as its distributions are primarily treated as interest income, which may offer more favorable tax treatment than dividends in certain jurisdictions.

Conclusion: A Strategic Addition to the Income Investor's Toolkit

The BMO Canadian MBS Index ETF (ZMBS.TO) stands out as a reliable source of monthly income in a low-yield environment. Its CAD 0.06 dividend reflects the steady performance of its underlying MBS portfolio, while its diversified maturity structure and BMO's management reputation enhance its appeal. For investors seeking alternatives to traditional fixed income, ZMBS offers a compelling blend of yield, stability, and cost efficiency. However, as with any investment, due diligence on macroeconomic risks and portfolio diversification remains essential.