Ginnie Mae Investing

CD rates and money market accounts currently offer dismal returns.  What is an investor to do to get higher returns, yet not drastically increase risk?  As I mentioned in my 4% Rule to Investing, Ginnie Maes are a good possible alternative.  Who is Ginnie, and does she have anything to do with Fannie and Freddie?  Ginnie Mae, otherwise known as the Government National Mortgage Association, is a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD).  Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government.  Ginnie Mae, which extracts fees for guaranteeing mortgage investors are repaid, is a smaller and more conservative player in the mortgage market than Fannie Mae and Freddie Mac were.

Now that you know what is Ginnie Mae, lets talk about these factors:

  • What kind of returns should you expect?
  • How volatile are they (what’s their beta)?
  • What risks do you have when investing?
  • How can you invest in them?

Returns

Vanguard’s GMNA Fund returns of $10k for the past 10 years (click for a larger view)

Ginnie Mae returns are outstanding when compared to other government bonds.  According to Morningstar, the Vanguard GMNA Fund has gotten an average 6.36% for the past ten years.  The 1, 5, and 15 year returns also show similar returns, so its beta is very low. As the graph shows above, if you invested $10,000 in January 2000, you would have almost doubled your money.  This is a perfect investment to add into your security bucket (fixed income) of assets.  At the moment, I have a portion of my security bucket into a Ginnie Mae mutual fund.  Ginnie Mae are generating a much better return than other government bonds, CDs and money market accounts.  So you are getting a premium return compared to treasuries, yet getting the same default risk as a treasury.  What’s there not to like about Ginnie Mae bonds?  In my opinion, the rate spread doesn’t warrant the implied increased risk and are good bet to place in your portfolio.

Risks

As with all bonds, they can suffer interest rate risk and should always be part of your investment equation.  If the FED increases interest rates, the returns on Ginne Maes could decrease.  They also can have (albeit very low) default risk from the government.  The primary issue is when investing through mutual funds, because not all bond funds are alike.  According to the Washington Post, some Ginne Mae funds invested in other bonds, and got burned during the 2008-2009 stock market crash.  One fund lost over 5% in one year.  Granted, a mutual fund named GNMA legally must invest at least 80% into Ginnie Maes, but it’s the remaining 20% that’s the killer.  I always recommend using Morningstar to do your research.  Find out what other securities the mutual fund invests in and at what percentage.

Investing

The minimum investment for a Ginnie Mae bond is generally $25,000. You can visit Ginnie Mae’s web site for more information.  Unless you are investing $200-300k to get proper diversification, I wouldn’t even consider that option.  Most people are best suited to invest via a Ginnie Mae mutual fund. The reasons are: better diversification and yu don’t have to buy/sell the individual securities. In my opinion, the two best funds are from Vanguard and Fidelity:

  • Vanguard (VFIIX) – 0.23% expense ratio, $3000 minimum investment
  • Fidelity GMNA Fund (FGMNX) – 0.45% expense ratio, $2500 minimum investment

Both have a low expense ratio, consistent performance, and a low minimum deposit requirement.  There are many other GMNA mutual funds available.  Do your research on Morningstar for others.  Currently there isn’t a Ginnie Mae ETF and mainly because there isn’t an index to base the ETF upon. With active ETFs becoming more common, I suspect a Ginnie Mae ETF might be on the horizon.

Disclosure: I own shares of FGMNX.

Comments

  1. says

    I have never heard of Ginnie Mae before. I appreciate this post. Just curious, with an average of a little over 6% return, will this be anything after inflation?

  2. says

    GMNA’s are a great investment with stable or dropping interest rates. They tend to act much like long term bond funds. Right now I think we are on the cusp of some rate hikes which will decay the principal values of GMNA funds.

    • says

      Hey Paul, thanks for visiting. I don't think your assessment is way off. The question is when will rate hikes occur? I think we have a least one year, because the FED will base a rate increase upon the unemployment number.

  3. dan says

    Thanks for the article. Do GNMAs have varying maturities similar to treasuries? I noticed that the duration for the vanguard GNMA is low, like 1.9 years – implying relatively short-term investments. On the Wall Street Journal page all they show are quotes for “30 yr” GNMAs and they don’t provide a yield.
    Thank you for any help you can give.

  4. paul kayle says

    If you sell your ginnie mae mutual fund before the end of the month, are you entitled to the
    interest earned to the sell date.?

    • says

      Hi Paul,

      That is a question to ask the specific mutual fund. Generally with mutual funds you are only entitled to the interest of the ex-dividend date of the mutual fund, not the ex-dividend date of the stocks and bonds owned within the fund itself.

  5. Ron says

    FGMNX has been steadily dropping in the past month or so. Am retired and really cant afford to get hurt big time right now. Wondering if now is the time to bail out of FGMNX??

  6. Matt says

    I have been in Ginnie Mae’s for the past dozen years, I am 64 and have been very happy with the low risk and solid return over the years. I am seeing the current performance dropping off substantially and am wondering if it is time to look to some other fund to replace the Ginnie Mae, do you have any recomendation?

  7. FGMNX-investor says

    What do you think is going to be with FGMNX in future. It’s negative 2.65% YTD, when do you think it’s going to gain that even out? How further deep it can go? I’ve invested pretty decent amount and losing 2% over all. What is your recommendation from now to next 2 years? Thanks.

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