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Subject:  Re: GNMA Talk from Vanguard Date:  3/17/2006  10:53 PM
Author:  Lokicious Number:  15815 of 36383

"So, is this article suggesting that the Vanguard GNMA fund is a good, safe investment? Because I have owned it for several years, and it is in the hole. (I have not reinvested dividends.) I have been thinking about selling at least half of it, but maybe this is not the right time. Opinions?"

You should read the risk assessment on the GNMA fund on the Vanguard site, because I think it is accurate. They don't have a high default risk, although some of those playing with high risk mortgage lending do. However, like any bond fund, there is interest rate risk, and as mortgage rates have gone back up, the NAV has gone down. This can be compounded by refinancing risk.

I'm surprised to hear you are in the hole. Do you mean the NAV is below your initial investment price, or have you lost even after dividends? With a bond fund, you need to assess your total return as dividends plus or minor change in NAV (plus compounding). Vanguard lists total returns over 3 years as averaging a little over 3% annually, a little over 5% for 5 years.

I don't know what to expect with interest rates over the next few years—Dr. Tarr thinks we'll see less refinancing, which is probably right, but I don't know if we'll see people trying to lock in longer mortgages, which would increase the duration on the fund. At the moment, if I had to choose a Vanguard fund, I'd probably go for the Total Bond Market, now that we've discovered the Short Bond Index Fund's listed SEC yield is way off the actual dividend (the Total fund is closer).
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