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No. of Recommendations: 2
ValueMonger,

Your are applying total return analysis to an income-only question. Total return means nothing if you are only spending the income and the asset is debt with zero default risk. Income will always increase in a GNMA fund when interest rates increase, which almost always happens when inflation increases. Moreover, your rate of reinvestment of distributions should always match the rate of inflation so that your income stream stays at least constant in real terms.

Consider what one has to do as a GNMA investor when inflation increases. You should always be viewing the inflation-premium part of the interest you are getting as return of capital and should be reinvested in more shares. So, if the fund yield increases 2 points, and inflation also increased 2 points, you need to be putting all that increase in income back into more shares, and increasing your withdrawals from the fund only in line with your build-up in share count.

The decline in share price as inflation increases actually helps you to increase your nominal income in line with inflation because your reinvestment purchases are made at the new lower share price.

Yes, we're talking very small real returns. That comes with the territory when that asset is liquid, short-duration debt, with zero default risk. But the question is, are they inflation-protected. I continue to believe they are, provided you only spend the real-return part of the nominal return and reinvest the inflation-premium part of the return.

Here are the annual total return numbers. But they are useless to the current question, because they are a mix of share-value change and income.

Annual Total Return (%) History
Year (first % is the fund total return. Second is the GNMA category)
VFIIXCategory
2019
N/AN/A
2018
0.87%0.51%
2017
1.87%1.58%
2016
1.85%0.89%
2015
1.33%0.49%
2014
6.65%4.73%
2013
-2.23%-2.72%
2012
2.35%2.80%
2011
7.68%6.70%
2010
6.94%5.66%
2009
5.29%4.74%
2008
7.22%4.76%
2007
7.01%6.09%
2006
4.33%3.47%
2005
3.33%1.91%
2004
4.13%3.01%
2003
2.49%1.90%
2002
9.68%9.23%
2001
7.94%6.81%
2000
11.22%10.86%
1999
0.78%-1.35%
1998
7.14%7.49%
1997
9.47%8.68%
1996
5.24%2.91%
1995
17.04%16.45%
1994
-0.95%-3.79%
1993
5.90%8.16%
1992
6.85%6.34%
1991
16.77%14.57%
1990
10.32%8.68%
1989
14.77%12.18%
1988
8.81%6.92%
1987
2.15%1.32%
1986
11.69%11.88%
1985
20.68%18.33%
1984
14.03%12.59%
1983
9.65%8.09%
1982
31.56%28.21%
1981
4.78%4.52%
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