What Is the Weighted Average Remaining Term (WART)?

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What Is the Weighted Average Remaining Term (WART)?

Let me explain what Weighted Average Remaining Term (WART) really is—it's a metric that shows you the average time left until maturity for a portfolio of asset-backed securities (ABS). If the WART is longer, that means the assets in your portfolio will take more time to mature on average.

You might also hear it called weighted average maturity (WAM), and it's frequently used with mortgage-backed securities (MBS), but it applies to any fixed-income securities portfolio. Remember, WART is basically the flip side of weighted average loan age (WALA).

Key Takeaways on WART

Here's what you need to know: WART measures the average maturity time of a fixed-income portfolio. It's the same as WAM and is key for MBS and ABS, though it works for any fixed-income setup. If you're an investor who cares about specific maturity profiles, WART lets you compare options directly. Most importantly, it helps you gauge interest rate and prepayment risks in your portfolio.

How the Weighted Average Remaining Term (WART) Works

WART gives you a clear picture of whether your portfolio's assets mature soon or far out. For example, an MBS with mortgages close to payoff has a low WART, while one with new loans has a high one. Depending on your risk tolerance and funding, you might prefer certain maturities.

To calculate it, start by totaling the outstanding balances of the assets and figuring each one's share of that total. Then, weight each asset's remaining maturity by its share, and sum those up for the portfolio's WART.

You'll see WART in disclosures for MBS from places like Freddie Mac, where it shows how things like prepayments affect the security. Use it to compare investments or build a portfolio with varied WARTs.

Example of WART

Take an MBS with four loans: Loan 1 has $150,000 left due in 5 years, Loan 2 $200,000 in 7 years, Loan 3 $50,000 in 10 years, and Loan 4 $100,000 in 20 years. Total remaining is $500,000.

Figure each loan's share: Loan 1 is 30%, Loan 2 40%, Loan 3 10%, Loan 4 20%. Multiply maturities by shares: 5 x 0.3 = 1.5, 7 x 0.4 = 2.8, 10 x 0.1 = 1, 20 x 0.2 = 4. Add them up, and you get a WART of 9.3 years.

WART and Interest Rate Risk

Securities with longer maturities are more sensitive to interest rate shifts—that's duration in action. So, MBS or ABS with high WARTs carry more interest rate risk than those with low ones.

One strategy to handle this is bond laddering, where you buy bonds maturing at different times. This spreads out your reinvestments, reducing the risk of dumping everything back in when rates are low. If you're focused on income, use WART to keep your portfolio's interest rates steady.

WART vs. WALA

Both WART and Weighted Average Loan Age (WALA) help estimate credit risk, interest rate sensitivity, and profitability in fixed-income portfolios. WART (or WAM) measures time to maturity for MBS pools, weighted by investment amounts—higher WART means more rate sensitivity.

WALA is just the inverse: it multiplies months or years to maturity by percentages and sums them for the average maturity.

What Is Prepayment Risk?

Prepayment risk hits MBS and ABS when debtors pay early or refinance, shortening the portfolio's WART and altering its risk. This is big in falling rate environments, as refinanced mortgages cut off cash flows from the original loans.