Ginnie Mae or GNMA Funds

» RandeS - Similar question in "Ask Rande.

A coupon of about 6.5% and an overall gain of around 3% would indicate an approximate loss in appreciation of about 3.5%. Total return in a bond fund is the combination of appreciation/depreciation and coupon. I would hang onto the GNMA fund. Rates have risen, causing bond prices to fall. The odds of rates rising from this point, as opposed to declining, favor the investment in the opinion of many (Brinker, Rukeyser, Garzarelli, etc.). Regardless of what rates are doing in the short-term, the Vanguard GNMA fund is a good long-term core bond holding. Shorter duration, excellent credit quality, good coupon, lack of derivatives, good management and low fees make it a winner.

Addendum: Historically, GNMA investments have had something of a "whammy" associated with them. As with all bonds, they decline in a rising rate environment. However, should rates decline too much GNMAs may underperform other bonds of similar maturity and credit quality (i.e., Treasuries). This is because as mortgages are refinanced at the lower rates GNMA investors face reinvestment risk. Provided the maturities are managed well and the fund manager knows what he/she is doing this problem can be mitigated, while the extra coupon is worth the "risk." Vanguard fits the bill in this regard. The return has been terrific over the past few years despite an incredible decline in rates and massive mortgage refinancings.

-- posted by RandeS

» Karin1 - Not Vanguard

-- posted by Karin1

» RandeS - Karin,

The Schwab rep probably pushed the Lexington fund becuase they participate in One Source, which means Schwab gets an ongoing revenue stream for assets they gather into the fund. Still, you could have done a lot worse. Lexington is ranked in the 1st percentile by Morningstar for its peer group for the past 12 months and 3 year periods (16th and 5th percentile respectively for the Vanguard fund). Also, the fund is in the top 2nd percentile for the 5 year period, 4th percentile for the 10 year period and the 8th percentile for the 15 year period (Vanguard is in the 3rd, 3rd, and 1st respectively for these periods -- but the current manager has only been there 5 years while Lexington's has been there 18 years). The BIG problem is one of fees. Lexington charges 1.01% in annual expenses while Vanguard charges .30%. Still, the higher fees don't seem to have hurt the performance so far, especially since the portfolio's duration was recently at 3 years vs. the 3.8 years for Vanguard (less volatile). Aside from the higher expenses, looks like a winner.

-- posted by RandeS

» KirkL - Avoid GNMA Funds???

1. When rates go down, people refinance so you have to reinvest at a lower rate. This effectively lowers the average maturity when you want it to be long.
   
2. When Rates go up, people hold on longer so your effective average maturity goes longer, perhaps 15 yrs, when you want it shorter so you can refinance at higher rates.

Comments? I believe both Bob Brinker and Bill Flannagen both like GNMA's. I hold GNMA's but haven't thought about this much. I also own an intermediate term bond fund in my IRA.

-- posted by KirkL

» Kirk - VFIIX Chart

<img src=http://216.32.224.100/bc3/intchart/frame... width=430 height=218>

-- posted by Kirk

» Kirk - Re: VFIIX Chart

Time to put in a GNMA chart that works! The one above is now dead!

<img src=http://pvcharts.quicken.com/images/chart... width=470 height=250>

My bond fund mentioned back in 1999, FTHRX, along with Vanguard and Fidelity GNMA funds (VFIIX & FGMNX) sure have done well. Bill Gross's Pimco fund tops the return list but GNMAs sure have done well. It looks like Bob Brinker was right and Michael Holland was wrong back in 1999.

  Date       Kirk    S&P500   Delta
2003 YTD    +26.4%   13.1%    13.6%  as of 6/7/2003 
 
                              Kirk   S&P500+   NASDAQ 
4+ Yrs 12/31/98 to 06/7/03    93.8%  (15.2%)  (25.8%) 

+with dividends reinvested.

-- posted by Kirk

» Kirk - Ginnie Mae Fund Duration Comparison

Fidelity Ginnie Mae Fund
http://personal.fidelity.com/products/fu...
Quick Stats
YTD Return (06/16/2003) 1.21%
30 Day Yield (06/13/2003) 2.67%
Portfolio Data As of 05/31/2003
Average Maturity 2.4 yrs
Duration = 0.7 yrs

Wow... 0.7yr duration means a 1% gain in rates will only cost the fund 0.7% in NAV. This also means less yield... but

Average Annual Total Returns 3(%)
as of 05/31/2003
3 Year = 8.43%
10 Year = 6.48%
Expense Ratio as of 01/31/2003 0.57%
Expense Cap 5 as of 05/27/1999 0.63%

Vanguard GNMA Inv CL
http://personal.fidelity.com/global/sear...
Quick Stats
YTD Return (06/16/2003) 2.14%
30-Day: 4.48%
NAV (06/16/2003) 10.73

Portfolio Data As of 12/31/2002
Duration = 1.9 yrs

Higher duration means higher interest rate risk. Of course, this means it is up more YTD than the Fidelity GNMA Fund.

Quarter-End Average Annual Total Returns2(%) as of 03/31/2003
3 Year 9.20%
10 Year = 7.06%
Expense Ratio as of 01/31/2002 0.25%

So.. if rates keep going down, then you want the Vanguard GNMA fund but if rates go up then you want the Fidelity GNMA fund (or cash in money funds!)

-- posted by Kirk

» allancoleman - schwab GNMA funds

-- posted by allancoleman

» allancoleman - Re: Re: schwab GNMA funds

-- posted by allancoleman

» Kirk - Re: schwab GNMA funds

Here is what I can find

For the big savers with $50K
Schwab GNMA Fund - Select Shares (SWGSX)
Annual Operating Expenses: Fund: 0.55%
30-Day SEC Yield 2.39%
Average Maturity 2.6 yrs.
Investment Minimums
Initial $50,000
Subsequent $1,000
IRA Initial $50,000
IRA Subsequent $1,000
Custodial Initial $50,000
Custodial Subsequent $1,000

Schwab GNMA Fund - Investor Shares (SWGIX)

30-Day SEC Yield 2.39%
Average Maturity 2.6 yrs

Annual Operating Expenses: Fund: 0.74%
Higher than Fidelity!
This is why I've moved most of my funds from Schwab to Fidelity and have direct accounts at Vanguard to get their low cost funds direct without a transaction fee.

Investment Minimums

Initial $2,500
Subsequent $500
IRA Initial $1,000
IRA Subsequent $500
Custodial Initial $1,000
Custodial Subsequent $100

-- posted by Kirk