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GNMA Bond Funds© Sound Mind Investing | July 2009
Q: The Ginnie Mae fund (VFIIX) you recommend for Level 2 savers fell almost 1.5% from mid-May to mid-June. The Vanguard site says the fund may not earn predicted returns because of people refinancing mortgages. Should I stick with this fund? A: This recent volatility illustrates why we recommend GNMA bonds only for savers with a 3-5 year time frame. A longer holding period helps smooth out the rough spots, allowing GNMA investors to wind up with an attractive rate of return overall. The recent loss (though substantial) isn't that unusual. VFIIX suffered a monthly loss of at least 1% in five of the past eight years. Despite these rough patches, the fund has been able to post solid longer-term results. Regarding refinancing, the recent refi boom appears to be subsiding as rates rise, so that impact may soon run its course. Obviously, we can't predict what the fund will do in the next few months, but if history is any guide, it will continue to be a good option for savers who have a long enough time horizon. Of course, you should consider the fund's returns relative to other rates currently available to savers. Unfortunately, interest rates for savings are low across the board. RELATED ARTICLES
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