Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some mortgage finance companies to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR S&P Mortgage Finance ETF (NYSEMKT: KME) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of mortgage finance companies simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on mortgage finance companies, sports a relatively low expense ratio -- an annual fee -- of 0.35%. The fund is very small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This mortgage-finance-companies ETF has outperformed the world market over the past three years and is lagging slightly year to date. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why mortgage finance companies?
The housing market is finally turning around -- slowly -- and mortgage finance companies will be among the beneficiaries. This SPDR S&P Mortgage Finance ETF contains a range of financial companies related to mortgages, including lenders, mortgage insurers, and more.
More than a handful of mortgage finance companies had strong performances over the past year. MGIC Investment Corporation (MTG 1.65%), a mortgage insurer, surged 57%. It recently posted surprisingly strong first-quarter results, in part due to a drop in defaults and despite 20% lower sales volume. Earnings returned to profitability (and to a level not seen since 2007) and blew past estimates by 67%. This is the third quarter in a row featuring estimate-surpassing results. MGIC's percentage of delinquent loans fell to about 8% in the last quarter from about 9% in the previous one -- and nearly 13% a year ago.
New York Community Bancorp (NYCB) gained 27% and yields a hefty 6.2% -- though its steep payout ratio suggests big dividend hikes aren't around the corner. Its growth has far outpaced that of its peers, and much of its success owes to the fact that it rarely writes bad loans. Its cost of funds, though, is higher than those of many other banks, in part because it relies significantly on debt and also has relatively few noninterest-bearing deposits, thus paying more in interest than many peers.
People's United Financial (PBCT) advanced 15% and yields 4.5%. Bulls like its fat dividend, its low-cost deposits, and its falling share count -- recently down 8%. Critics, though, see falling net interest margins and the bank's need to cut costs. People's United Financial's last quarter featured earnings that fell short of expectations, though management pointed out annualized loan growth of 4% and organic deposit growth of 10%, along with a drop in the percentage of nonperforming loans from 1.25% last year to 0.84% this past quarter.
The big picture
If you're interested in adding some mortgage finance companies to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make profiting from it that much easier.
