A Guide To GNMA Mutual Funds

GNMA mutual funds (pronounced Ginnie Mae) are a type of moderately-high-yield bond mutual funds, commonly used as an alternative to investment-grade-corporate or treasury bond funds for more aggressive investors. In light of the real estate crash, GNMA funds have gotten a bit of a bad reputation for reasons we’ll get to in just a second.  But in spite of them being out of favor, or perhaps because of it, GNMA mutual funds can make solid long-term investments.

GNMA bonds are nothing more than residential home mortgages packaged together and sold on the market. Sound familiar? This is the same kind of mortgage securitization that has caused such chaos on the markets lately. But hear me out before you reject these funds outright. The problem hasn’t been GNMA bonds in general. To the contrary, the high-quality GNMA bonds owned by the likes of Vanguard’s GNMA Fund (VFIIX) navigated the financial crisis with ease and hasn’t had a losing year in over a decade. The problem, of course, was that  financial institutions owned too many sub-prime mortgages. Due to the the underwriting standards mortgages have to go through in order to qualify for GNMA status, relatively few low-quality mortgages made it into most high-quality GNMA funds.

And yet because of the bad reputation mortgage-backed securities have acquired, these bond funds sport relatively attractive yields other to other kinds of bonds and relative to their risk profile. This makes them an attractive place to invest a small portion of your portfolio. However, remember that timing the bond market is as difficult as timing the stock market. You never really know which asset class is going to out-perform and which will under-perform going forward, so it’s best to spread your money around. For this reason, I would highly discourage you from investing more than 10-15% of your portfolio in GNMA mutual funds. And as always, when in doubt, as your financial advisor.

For everything you would ever need to know and more about GNMA mutual funds (or mutual funds of any kind, for that matter), I highly recommend signing up for a free account at Morningstar to gain access to some of their excellent tools. Or you can get $20 off a one year subscription for an Annual Premium Membership at Morningstar using the above link.