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Symbol: VFIIX
Category: Core Bond Fund
Style: Active
LB Rating: 4 Stars
Last Updated:  11/15/12

Useful Links:
Choosing a bond fund with LB Ratings
Agency Mortgage Backed Securities – What they are and how they work.
What you need to know about core bond funds
Choosing a core bond fund

Vanguard GNMA Fund Overview

Summary: If you are looking for a fund with the safety of a US Government Bond Fund but with significantly more yield, then the Vanguard GNMA fund is worth a look.

Commentary: The Vanguard GNMA fund invests in pools of mortgages which are baked by the Government National Mortgage Association (GNMA).  GNMA, which is also referred to as Ginnie Mae, is a government agency that insures certain types of mortgages against default.  Because Ginnie Mae is backed by the full faith and credit of the US Government, GNMA backed mortgages are as safe as US Treasuries from a credit risk standpoint.

The upside of a fund that invests in GNMA insured mortgages is that you get the same government guarantee as US Treasuries, but with a much higher yield.  Currently the Vanguard GNMA Fund has an SEC yield of 2.22%.  This compares to an SEC yield of around 1% for US Government Bond funds with similar durations.

The downside is that when interest rates fall, the value of the fund does not rise as fast.  The reason why is because of pre-payment risk.  When interest rates fall, homeowners often pay off their mortgages early in order to refinance at the lower rate.  You can learn more about this in our article on agency mortgage backed securities.

Vanguard GNMA Fund Rating Criteria

Short-Term Performance: Good. The Vanguard GNMA Fund has underperformed the average intermediate term government bond fund by .59% over the last 1 year.  Over the last 3 years it has outperformed by an average of .49% per year.

Long-Term Performance: Excellent. The fund has outperformed the average intermediate term government bond fund over the last 5 and 10 year periods.  Its performance is especially steller over the last 10 years, where it has outperformed by .84% on average per year.

Returns Relative to Risk: Excellent  The Vanguard GNMA fund invests primarily in government insured mortgages which have zero credit risk.  With a duration of 3.64 the fund currently has only a moderate amount of interest rate risk.  However, it should be noted that if interest rates rise, the duration of the fund will increase because less borrowers will pre-pay their mortgages. Bottom line, the duration may underestimate the interest rate risk..

Fees: Excellent The Vanguard GNMA Fund charges  .21% in annual expenses.  If you have $50,000 to invest, the annual expense ratio goes down to .11%.  As with all funds at Vanguard, there is no load fees charged.  You can learn more about bond mutual fund fees here.

Manager Tenure: Excellent If you read the fund’s fact sheet, it may show that the fund’s manager Michael Garrett has only been with the fund since 2010.  Michael has been working with the fund since 1999.  However, he left the fund briefly in 2009 to help oversee the Fed’s purchases of agency securities after the financial crisis, before returning to the fund in 2010.