No Need to Bail on Mortgage Funds
This article originally appeared in The Save Safe Plan newsletter. For more information on this product, please click here.
While interest rates steadily plummeted over the past three years, homeowners have rejoiced. Indeed, many seem to have exuberantly taken up refinancing their mortgages as an amusing new hobby. (You know who you are.)
But while today's super-low mortgage rates (the national average is 5.6%, according to
Typically, lower interest rates benefit mortgage funds. As mortgage rates drop in concert with interest rates, the mortgages the funds already hold pay a higher yield than the newer mortgages. But mortgage funds -- usually a better bet than Treasuries -- posted a measly 2.1% in the first six months this year, while long-term Treasury funds have fared more than twice as well, returning an average 5.7%, according to Morningstar.But while this somewhat startling trend isn't likely to turn around in the next six months, there's no reason to bail on mortgage funds. "If you're looking for an extra kick to your portfolio in the next three to six months, you're probably not going to get it from mortgage funds," says Andrew Clark, a senior research analyst with Lipper, a Reuters company. "But if you're holding a mortgage fund, you don't need to get rid of it. They're still relatively safe, and their yields beat Treasuries. Those are two really good reasons to hold these funds for the long term." Mortgage funds generally present higher returns than Treasuries because of the moderately higher risk. There's prepayment risk, which occurs when homeowners pay off their higher rate loans with new loans at a lower rate (i.e., refinancing). And then there's extension risk, which happens as interest rates rise and the bulk of the mortgages that a fund holds yields less than the higher-rate mortgages being issued.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV