Pass-Through Security

Think of a mob boss putting money into front companies. A criminal with a bunch of extra cash buys a laundromat and puts the business under his cousin's name. The cousin owns the laundry. But he sends the mob boss his cut every week...or else. The mob boss doesn't own the business; his deal is that he's entitled to some of the cash.

A pass-through security operates in a similar fashion. A group of assets are pooled together. You buy a pass-through security based on those assets. The revenue generated passes through a third-party administrator (often the issuer of the security) to you and the rest of the PTS holders.

Mortgage-backed securities represent the most prominent example of these forms of investment. An MBS is comprised of a basket of underlying mortgages. A bank (or other financial institution) acquires a bunch of similar mortgages. It then issues tradable securities based on those mortgages.

These investments become the pass-through securities. Holders of the MBS are entitled to a portion of the revenues generated from those mortgages. (Unless, of course, it's 2008, and the MBS market goes south and everyone starts checking to see if their life insurance policies cover self-harm).