Mortgage Investments: The Hot ETF Play of 2019
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With your money briefing, I'm J.R. Whalen at The Wall Street Journal in New York. Next time you're at a cocktail party, start talking about investing in mortgages. You might just attract a crowd. Turns out they're currently one of the hottest market plays on Wall Street. We'll go through the numbers in a moment. First, these money and market stories you should know. Personal income, which takes an American's pre-tax earnings from wages, salaries, and investments, fell 0.1% in January after a much larger-than-expected 1% rise in December. The Commerce Department says that was a spike in December, and as such, the Journal's economic team says the decline likely will not extend into February. Also, personal consumption expenditures, that's a measure of household spending on everything from breakfast cereal to health care, decreased a seasonally adjusted 0.5% in December from the prior month.
Still, overall consumer spending grew at 2.8% annual rate in the fourth quarter. You couple that with a strong labor market, and it's likely to bolster spending as we progress through 2019. And if you're not spending, you might be saving your money. And if you're looking for decent interest rates on savings, robo-advisors are expanding into the cash management market and could be the way to go. Consider this, the national average U.S. banks are paying savers is one-tenth of one percent. The robo-advisor Wealthfront, for one, offers a 2.24% annual interest rate, with numerous others, like Goldman Sachs' Marcus Cash Management Tool and Betterment, offering similar rates. See the full story in a table outlining all the rates on WSJ.com and the WSJ app.
Mortgages aren't the sexiest topic when it comes to investing, but when they can put some extra money in your pocket, well that could change things up. Turns out an ETF that bets on home loans is one of the hottest plays for investors in 2019. And Wall Street Journal reporter Ajalyn Loder is here with the details. So, Ajalyn, the market upheaval in late 2018 sent investors looking for shelter, pun intended, and they found it in housing loans.
What recent economic data on personal income and spending should investors know?
The good thing about housing loans, this type anyway, these aren't the no-doc loans that triggered the financial crisis. These are investment-grade mortgages made to creditworthy borrowers. They're agency-backed. So it's relatively safe, but it's also offering a pretty decent yield at a low duration. And the duration means you're not as exposed if interest rates do start to rise again.
So it's important for investors here when they're researching the ETFs to look at the duration. And it's measured in years to see how they might be exposed to interest rate increases.
That's right. Duration, basically, the longer the duration, the more vulnerable you are to losses when interest rates rise. You're more vulnerable. It's not that you're not vulnerable at all with four years duration. It's that you're less vulnerable than a product that has eight or 10 years duration.
And if you can lower the volatility and lower the exposure, then you're ahead of the game.
Exactly. And these are yielding over 3%, these mortgage-backed securities ETFs. They're yielding over 3% with a four-year duration and got really popular basically when people were first looking for what do I do after December's market crisis? How do I bulletproof my portfolio a little bit against more market turbulence? And also, how do I keep from exposing myself to rising rates? And part of what made this particular ETF so popular was you really see the inflow surge after the Federal Reserve basically said, we're going to pause interest rate increases for the time being.
There's an iShares ETF that you highlight in your story in the journal, and it doesn't expose investors to credit risk, and that's an attractive attribute for them.
To be clear, the mortgages are agency-backed. They're backed by Fannie Mae and Freddie Mac. So you're not taking the risk that you're going to have a whole bunch of subprime defaults because these aren't those kinds of mortgages.
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