TIPS vs GNMA Performance with 2.2% Inflation Rate

TIPS vs GNMA Performance update with 2.2% CPI-U Inflation Rate.  Both securities are backed by the U.S. government.

Bob Brinker continues to recommend Vanguard's GNMA Fund, VFIIX, on his radio show. Over the course of last year, I sold out of my "explore portfolio" position in Vanguard's GNMA fund and replaced it with individual TIPS.  A good, recommended alternative is Vanguard's TIPS fund, VIPSX.

Vanguard Comparison Table
Vanguard Fund (5/24/10)	SYMBOL	Yield	YTD
GNMA	VFIIX	2.97%	2.79%
Total Bond Index	VBMFX	3.01%	4.05%
Prime Money Market Fund	VMMXX	0.05%	0.01%
Inflation Protected Security Fund (TIPS)	VIPSX	0.65%	3.00%
Total Stock Market Index Fund (for comparison)	VTSMX	1.48%	-0.95%

Last Week's CPI Press Release says Year-over-year CPI rose at a 2.2% rate.

On a seasonally adjusted basis, the Consumer Price Index for All  Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S.  Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment.

• My 5-yr TIPS with a 1.25% base rate will earn 3.35% at this rate of inflation.
• My 20-yr TIPS with a 1.375% base rate will earn 3.575% at this rate of inflation

In the Retairement Advisor newsletter, we recommended the TIPS fund from Vanguard, VIPSX, over TIPS for all of 2009 and so far this year.

2009 Total Return
VFIIX = 6.9%
VBMFX = 5.9%
VMMXX = 0.53%
VIPSX =  10.8%
VTSMX = 28.7%

• GNMA:  Government National Mortgage Association (”Ginnie Mae”) securities. 
• TIPS:  Treasury Inflation Protected Securities 

More Information:

• Los Altos Town Crier Newspaper Article about my success
• Kirk's Two Investment Letters
• Newsletter Testimonials 

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TIPS vs GNMA Performance Update with 2.1% CPI-U Inflation Rate

Bob Brinker continues to recommend Vanguard's GNMA Fund, VFIIX, on his radio show. Over the course of last year, I sold out of my "explore portfolio" position in Vanguard's GNMA fund and replaced it with individual TIPS.

Today's CPI Press Release says Year-over-year CPI rose at a 2.1% rate

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.1 percent before seasonal adjustment.

Not seasonally adjusted CPI measures: The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.1 percent over the last 12 months to an index level of 216.741 (1982-84=100). For the month, the index was unchanged prior to seasonal adjustment.

My 5-yr TIPS with a 1.25% base rate will earn 3.35% at this rate of inflation
My 20-yr TIPS with a 1.375% base rate will earn 3.475% at this rate of inflation

In my other newsletter, The Retirement Advisor, we recommended Vanguard's TIPS fund, VIPSX, over Vanguard's GNMA fund last year.

Vanguard's GNMA fund, VFIIX currently at $10.82, currently yields 3.16% and will lose NAV (net asset value) if inflation spikes in the future. It will gain NAV if we see deflation and rates drop.

ECRI says we have begun a cyclical upturn in inflation. That doesn't mean we will get hyper (over 10%) inflation, but it means deflation is off the table.

• April 03, 2009: Upturn in ECRI's WLI Growth Rate Says US Business Cycle Recovery Ahead
  
• February 05, 2010: ECRI Global Inflation Outlook - Higher Inflation Ahead
  

Owning Vanguard's TIPS fund over its GNMA fund paid off last year:

• in 2009 Vanguard's TIPS fund, VIPSX, gained 10.8%
• in 2009 Vanguard's GNMA fund, VFIIX, gained 5.3%

More information:

• Kirk's Two Investment Letters

• October 25, 2009: Bob Brinker's GNMA VFIIX Bond Fund Timing Advice & My Alternatives