Vanguard GNMA Fund (VFIIX) LB Rating Report

Symbol: VFIIXVanguard GNMA Fund (VFIIX)
Category: Core Bond Fund
Style: Active
LB Rating: 4 Stars
Last Updated:  6/17/13

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 backed 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 2.09%.  This compares to an SEC yield of around 1.5% for US Government Bond funds with similar durations.

One downside is that when interest rates fall, the value of the fund may not rise, or rise as fast as other bond funds.  This 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.  The issue of pre-payment risk is very complicated and counter-intuitive. You can learn more about this in our article on agency mortgage backed securities.

If interest rates rise rapidly, like most bonds, the bonds held by the GNMA will lose value. Investors in a fund holding GNMA mortgage backed securities do well when there is a move to safer bonds or envinorments where interest rates on not rising or falling dramatically. There is a major concern that Mortgage Backed Securities, including GNMAs, will be greatly adversely impacted when the Federal Reserve stops buying them. The FED started buying $40 billion of them per month starting in Septermber 2012.

The Vanguard GNMA Fund, like many “actively managed”  Vanguard Funds is essentially an index fund in disguise. The overwheming majority of the performance comes from the asset class, not the decisions of the managers.

Vanguard GNMA Fund Rating Criteria

The rating of this fund does not include the short-term or long term performance numbers. The performance of this fund is essentially reflects the performance of GNMA MBS as a whole. For example, over the last 10 years the Barclays GNMA index has returned 4.92% and the Vanguard GNMA fund has returned 4.69%. A small difference which can be accounted for by the fund’s fees.

Short-Term Performance: The fund is down -0.86% over the last year, and over 3 years has annual performance of only 3.52%.  The Vanguard GNMA Fund  has underperformed the average intermediate term government bond fund over the last year by 0.65%. Over the 3 years, the performance looks better, returning 0.37% more than the category.

Long-Term Performance: 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 .91% 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 5.0 the fund currently has  a medium mount 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: Not really applicable but there is one. 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.


All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.

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