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Tuesday, February 10, 2009

Bob Brinker's Current GNMA Fund Advice

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

yield to maturity

The rate of return an investor would receive if a security is held to its maturity date.

3.4% 4.6%
Average coupon 5.6% 5.7%
Average maturity

average maturity

An average of the maturity dates for all securities in a money market or bond fund. (The maturity date is the date that a bond or money market instrument buyer will be repaid by the security's issuer.) The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates.

1.7 years 3.8 years
Average quality* Aaa AAA/AAA
Average duration

duration

A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.

**
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."

Vangaurd Fixed Income Funds:

GNMA (VFIIX),
Total Bond (VBMFX)
TIPS (VIPSX)
High-Yield/Junk Bond (VWEAX)
VFIIX chart at Wikinvest

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 12/31/09) (More info - FREE Sample Issue)

"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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6 comments:

  1. 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!

    ReplyDelete
  2. 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

    ReplyDelete
  3. ~ Marie ~ said...
    Hi 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."

    ReplyDelete
  4. 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%

    ReplyDelete
  5. I have a new article of

    Monday, 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.

    ReplyDelete
  6. 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

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