Weighted Average Remaining Term (WART)

What is WART?

Weighted Average Remaining Term (WART) measures the average time to maturity of the assets in a fixed‑income portfolio, weighted by each asset’s outstanding principal. It is commonly applied to mortgage‑backed securities (MBS) and other asset‑backed securities (ABS). A longer WART indicates that, on average, the portfolio’s cash flows occur further in the future.

WART is also referred to as weighted average maturity (WAM) in some contexts and is closely related to weighted average loan age (WALA), which is effectively the inverse.

Why it matters

• Helps investors compare portfolios with different maturity profiles.
• Indicates exposure to interest rate sensitivity: portfolios with larger WARTs are generally more sensitive to interest rate changes.
• Useful for assessing prepayment risk in MBS/ABS, since early repayments shorten the WART and change the portfolio’s risk profile.

How to calculate WART

1. Sum the outstanding principal of all assets in the portfolio.
2. For each asset, compute its weight = asset outstanding / total outstanding.
3. Multiply each asset’s remaining time to maturity by its weight to get weighted years.
4. Sum the weighted years to get the portfolio WART.

Example

Portfolio of four mortgages:
– Loan 1: $150,000 remaining, 5 years
– Loan 2: $200,000 remaining, 7 years
– Loan 3: $50,000 remaining, 10 years
– Loan 4: $100,000 remaining, 20 years

Total remaining principal = $500,000. Weights:
– Loan 1: 30% → 5 × 0.30 = 1.5 weighted years
– Loan 2: 40% → 7 × 0.40 = 2.8 weighted years
– Loan 3: 10% → 10 × 0.10 = 1.0 weighted years
– Loan 4: 20% → 20 × 0.20 = 4.0 weighted years

WART = 1.5 + 2.8 + 1.0 + 4.0 = 9.3 years

WART and interest rate risk

Longer‑dated cash flows typically have greater price sensitivity to interest rate changes (higher duration). Portfolios with higher WARTs generally exhibit greater interest rate risk. One common mitigation is bond laddering—buying securities with staggered maturities—so portions of the portfolio mature at different times, reducing the risk of reinvesting all proceeds when rates are unfavorable.

WART vs. WALA

• WART/WAM: Measures the weighted average remaining time to maturity for assets in a portfolio.
• WALA: Measures the weighted average loan age—how long loans have been outstanding; it is conceptually the inverse of WART for pools of loans.

Both metrics help estimate credit risk, interest rate sensitivity, and cash‑flow timing for MBS/ABS portfolios.

Prepayment risk

Prepayment risk occurs when borrowers refinance or pay off loans early, shortening the portfolio’s WART and reducing future cash flows. This risk increases when interest rates decline, as refinancing becomes more attractive to borrowers and can alter the expected return and risk profile of MBS/ABS holdings.

WAM vs. WAL (brief)

• WAM (weighted average maturity): Accounts for interest‑rate resets; used to describe average time to maturity.
• WAL (weighted average life): Measures the average time until principal is repaid; does not account for rate resets. WAL is commonly used in money market fund regulation (e.g., regulatory limits).

Key takeaways

• WART indicates the average remaining maturity of a fixed‑income portfolio, weighted by outstanding principal.
• It is especially relevant for MBS/ABS to assess interest rate sensitivity and prepayment exposure.
• Use WART alongside other measures (duration, WALA, WAL) when evaluating fixed‑income investments and constructing portfolios.