Originally Posted by Chuckanut
Swedroe seems to think that an intermediate treasury fund makes more sense and will do better in the long run than a similar GNMA fund. Any thoughts?
Yes, GNMA is really not a good bond holding. I have held Admiral shares since retiring and loved GNMA but I have read a lot about them and they really have a lot of risk that has not shown up, wait until mortgage rates start to rise. Many people much smarter than I am think that Intermediate Term treasuries is a much better fund. Let's see why.
GNMA Fund Admiral Shares Year-to-Date return as of 12/09/2011 7.42%
Inter-Term Treasury Adm Year-to-Date return as of 12/09/2011 9.21%
That's quite a difference for 11 months and it's capital appreciation from the rush to quality.
If you go to the Vanguard site and chart GNMA vs ITT for the 1, 3, 5 and 10 year time periods some of the time GNMA did better, some of the time ITT did better.
Knowing what I know today, in September 2007 I'd have put my rollover IRA into ITT not GNMA. I bought my GNMA at a pretty good price, $10.16 to $10.20 and I suspect that at the time the ITT nav was also pretty low.
GNMA fund really does not have a known duration, the ITT fund does. GNMA also suffers from extension risk where people won't refi when rates go up but do when rates go down so you are losing income from lower rates in GNMA than had you been in ITT.
There have been a lot of these discussions at the BH site.
I now think that ITT and TIPS are a better mix than GNMA. The nav on all bond funds is quite high today and I am loathe to pay top dollar for a fund that will have capital depreciation when rates do go up especially when they have durations of 6 and 9 years! At that time I'll exchange my GNMA for a Short Term Treasury and hope rates go up and don't stagnate, the best time to buy a bond fund is when the interest rates are high since the nav will be low. But market timing the bond market is no easier than the equity market.