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No. of Recommendations: 5
Jim, you might want to reconsider your GNMA fund as any protection from inflation.

Theoretically, fixed income is a poor performer in inflationary and/or rising rate environments, but do better in deflationary and/or decreasing rate environments.

Looking back at the prices you listed in your original Oct 2009 post, the fund was at $10.75 and adjusted for distributions was at Apr 87 was $2.27, this equates to a 7.15% nominal and a 4.2% real after inflation return.

Not bad at all. However, it is important to remember that was a declining interest rate environment.

What has it done since? Well in your original Oct 2009 post you mentioned that is had a 3.43% SEC yield and a $10.75 price, so that would equate to an annual distribution of 37 cents. As of Friday it had a price of $10.37 and yield of 2.98% so its annual distribution would be 31 cents.

So both its price and distribution has declined over the last 9 plus years, hardly an inflation hedge in my book. Schwab gives two total returns for the fund – SEC Pre-Liquidation and SEC Post Liquidation. For 1, 3, 5, & 10 year periods, the Pre/Post total returns are respectively 2.78%/2.48%; 0.33%/0.59%; 1.27%/1.35%; & 1.88%/1.94%. The decline in many interest rates over the last few months, really kicked up that 1 year total return. Schwab lists the average Pre/Post annual returns going back to its inception in Jun 1980 at 4.13%/4.12%.

Note the 10 year returns pretty much equal the inflation rate. Since the average return was 7.13% for the 22.5 years from Apr 1987 to Oct 2009, it is obvious that VFIIX performs much better during a declining rate environment than a rising one.

For a inflation hedge, VFIIX wouldn’t make my list, but it might do for a cash reserve fund. My cash reserve fund is my Kasasa checking and Kasasa saving accounts, I didn’t make the names myself. The checking pays 2.5% for balances up to $10,000 and 0.5% for balances over $10,000 and the savings account pays 1.5% on up to $10,000.

Since it is a constant value account, it would beat VGIIF during rising rates especially on small amounts. Needless to say, I don’t hold that much rainy day cash anymore.

VGIIF may not have tanked as some predicted, but neither has it done as well as it did prior to Oct 2009.
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