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|Should I buy a CMO?
By The-Adviser.com -
|New York -
A collateralized mortgage obligation (CMO) is a
derivative security that is backed with various underlying mortgage pools for collateral.
Although the mortgage pools may be from Fannie Maes or Ginnie Maes, CMO's are simply much
more aggressive and riskier investments.
A CMO is a tranche or a piece of mortgage pools that is sliced into various classes such as principal only classes, residuals, or classes based on ranges of interest rates. They are normally sold to financial institutions who can analyze these investment pools and who need to match up certain investments with their liabilities. Whatever CMO tranches are not sold to institutions, they are sold to individual investors.
Many brokers attempt to sell you these securities based on yield and the fact that yields are higher than various regular or plain-vanilla treasuries. The reason is the risk. Quick swings in interest rates - either up or down - can have a significant and often unknown effect on a CMO security. Maturities of the CMO's can not be predicted without any accuracy.
We believe that CMO's should not be owned by individual investors. If you are looking for a fixed income investment, purchase a no-load Treasury bond fund with expenses less than .5% annually. If you are certain that you will hold a bond until it's maturity, you may be able to purchase a Treasury bond direct and avoid paying the .5% fee.
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