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?
What is Ginnie Mae Investing?
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 was.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?
Ginnie Mae returns are outstanding when compared to other government bonds. According to Morningstar, the Vanguard GMNA Fund (VFIIX) 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.
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.
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.
I’m trying to streamline my portfolio and considering eliminating my GNMA fund but only if it’s prudent. I already have Vanguard Total Bond, Vanguard TIPS and Vanguard ST investment grade, plus an emerging markets bond fund (EMB). Am I overdiversifying by having Vanguard GNMA fund?
My mother owned some GNMAs and has passed. Can anyone tell me how to transfer the ownership of these securities to an heir, so that the estate can be closed?
Larry, how high do interest rates need to go to cause any significant impact in performance of GMNAE bonds? Do you consider this a wise investment for millenials?
I am 68 and want to retire next year. I have all my retirement in mutual funds and worry about another drop in the stock market. With the Fed interest rates as low as they are now is it wise to invest in the Ginie Mae Bonds? Doesn’t the rate of return drop when the Fed raised their interest rates ?
You are correct rising interest rates aren’t historically kind to Ginnie Mae Bonds, but this applies to really any bond.
Yea, what do you think about GNMA bond funds now after Friday’s (5 Jul 13) massacre??
To be expected based upon the treasury rates are increasing.
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.
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?
Ginnie Mae’s aren’t bad investments, but with any investment should be aware of their risks.
I have another post that talkes about possible other fixed income investment options:
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??
Ron, if you have that much money into FGMNX (ie not diversified) then you know the answer to your own question.
Ginnie Mae’s have definitely been the Cadillac of mortgage backed securities with government insurance and higher than average fixed income returns!
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.?
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.
How timely!! Confirms my interest in selecting GNMA for my Rollover IRA. I’m tired to chasing dips at 70 yrs of age.
Thanks for visiting.
Be aware of the difference between bonds and bond funds.
If we have a spike in interest rates (muni funds have recently taken a hit) this would cause a dip in GNMA NAV prices which would results in a decrease in your net return.
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.
15 – 30 years
I’m not aware if they are any shorter maturity. They are callable bonds since the owner of the mortgage can prepay or refi.
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.
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.
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?
Only time will tell on the inflation issue.
10 years is a long time. The Fed just printed $6T and still rolling. Any inflation risk on the radar?