RT Journal Article SR Electronic T1 Tradable Proxy Portfolios for an MBS Index JF The Journal of Fixed Income FD Institutional Investor Journals SP 70 OP 87 DO 10.3905/jfi.2001.319307 VO 11 IS 3 A1 Lev Dynkin A1 Vadim Konstantinovsky A1 Bruce D Phelps YR 2001 UL https://pm-research.com/content/11/3/70.abstract AB To some investors, the mortgage-backed securities market may seem intimidating. The authors show how investors with limited MBS experience can construct two proxy portfolios of liquid MBS securities that replicate the mortgage portion of the Lehman Brothers Global Aggregate Index. The first replication strategy holds only TBA contracts in the proxy portfolio. From January 1994 through May 2001 this TBA-only strategy exhibited a realized tracking error of 21 basis points per year. Better tracking is achieved by a second strategy, which buys large pools of current mortgage production and allows them to season over time. As the number of holdings in this large pool-only proxy rises, and the portfolio seasons, tracking error steadily declines to 5 basis points per year over the last two years. A variant that restricts the number of holdings to 12 produces a realized tracking error of 15 basis points per year. The chief merit of both strategies is an easy and effective replication of the MBS index without pool-level knowledge of the mortgage market.