Last weekend Bob Brinker was asked for his current outlook for the interest rate risk on his favorite GNMA fund. For years and years, Bob Brinker has recommended Vanguard's GNMA fund, ticker VFIIX, charts and current quote. VFIIX has one of the lowest expense ratios in the industry and thus has about the best long-term performance as a result.
More VFIIX Charts
Brinker said the fund has done quite well and its duration and average maturity are very short so there is less interest rate risk. Brinker also said he still expects the fund's net asset value, NAV, to trade between $9.50 and $10.50.
Here is what Vanguard says about the fund:
Fixed income characteristics as of 12/31/2008
| GNMA Fund Investor Shares | Barclays US GNMA Index | |
|---|---|---|
| Number of bonds | 25 | 120 |
| Yield to maturity | 3.4% | 4.6% |
| Average coupon | 5.6% | 5.7% |
| Average maturity | 1.7 years | 3.8 years |
| Average quality* | Aaa | AAA/AAA |
| Average duration ** | 1.0 years | 2.4 years |
| Short-term reserves | 0.2% | — |
| Fund total net assets | $29.2 billion | — |
| Share class total net assets | $14.7 billion | — |
An average duration of 1.0 years means the fund will lose about 1.0% in NAV for every 1.0% rise in interest rates.
You can see that the fund has positioned itself for higher rates by shortening maturity at the cost of lower yield to maturity and a slightly lower credit rating. (Understanding Credit Ratings will be covered in the March 2009 issue of The Retirement Advisor.)
VFIIX is NOT an index fund. Vanguard says the fund "Follows no specific maturity guidelines but typically maintains a dollar-weighted average maturity of 3 to 10 years."
You can see that the fund has positioned itself for higher rates by shortening maturity at the cost of lower yield to maturity and a slightly lower credit rating. (Understanding Credit Ratings will be covered in the March 2009 issue of The Retirement Advisor.)
VFIIX is NOT an index fund. Vanguard says the fund "Follows no specific maturity guidelines but typically maintains a dollar-weighted average maturity of 3 to 10 years."
Vangaurd Fixed Income Funds:
Kirk's Dec. 2009 Update. I sold ALL my GNMA holdings in my "explore portfolio" a few months ago for a nice gain from buying at a much lower price. I made two buys at $9.93 and $10.09, collected the interest and sold the last at $10.72. I then used the funds and some other cash in the portfolio to buy TIPS (at the auction directly via my broker) that are up about 2% since buying as I type.
My core portfolio had an index fund for fixed income that has a significant position in GNMAs but I sold that also in one of my very rare core portfolio changes.
The full details of my "core and explore" holdings with monthly updates are covered in each issue of "Kirk Lindstrom's Investment Letter."
Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 159% (a double plus another 59%!!) vs. the S&P500 UP a tiny 8.6% vs. NASDAQ UP a tiny 3.5% (All through
"Kirk Lindstrom's Investment Letter Explore Portfolio" gained 33.5% in 2009. This portfolio has 75% in equities and 25% fixed income with a beta of 1.0.
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Hi Kirk,
ReplyDeleteI am interested in an update from you on this article. With the current trade amount at $10.65 above the range listed in the article...whats the short and longer term view. We currently have no GNMA position and are considering adding a position in them. Your thought?
Thank you!
Dear Mr. Brinker,
ReplyDeleteI am concerned that Ginnie Mae may be going the way of Freddie Mac & Fannie Mae. I am basing my conclusions on the WSJ August 11, 2009 issue article: "The Next Fannie Mae," and the video clip: http://online.wsj.com/video/meet-ginnie-mae-the-next-big-taxpayer-bailout/1103B51D-F384-42B3-B46F-8B9A172A44B3.htm.
Roy Merrill
~ Marie ~ said...
ReplyDeleteHi Kirk, I am interested in an update from you on this article.
I sold ALL my GNMA holdings in my "explore portfolio" a few months ago for a nice gain from buying at a much lower price. I made two buys at $9.93 and $10.09, collected the interest and sold the last at $10.72. I then used the funds and some other cash in the portfolio to buy TIPS (at the auction directly via my broker) that are up about 2% since buying as I type.
My core portfolio had an index fund for fixed income that has a significant position in GNMAs but I sold that also in one of my very rare core portfolio changes.
The full details of my "core and explore" holdings with monthly updates are covered in each issue of "Kirk Lindstrom's Investment Letter."
Likewise I was sold all my GNMA about the same time a Kirk. I was unaware of his recommendation but I was looking at sub 3% yield and high share prices and also took the profit. Maybe in 2-3 years GNMA may come back below $10 a share at better yields. For now that money is split 50% / 50% intermediate / and long corporate bonds with a composite yield of just over 5%
ReplyDeleteI have a new article of
ReplyDeleteMonday, August 09, 2010 Bob Brinker's GNMA Advice
Bob Brinker's New GNMA Advice "Brinker's advice to the caller was to use a mental stop-loss" See the article for the number and any changes to that advice will be posted here in the comments section.
I'd also like to recommend all readers here get a FREE ISSUE of THE RETIREMENT ADVISOR newsletter. Details HERE. We've done much better than GNMAs and made some very significant changes to our recommended fixed income portfolios for 2011 which we detailed in the December 2010 Retirement Advisor newsletter.
ReplyDelete