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:
US Treasury Rates at a Glance - LIBOR Rates at a Glance
2 comments:
Hi Kirk,
I 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,
I 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
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