I'm looking for a bond fund for a specific sleeve of my portfolio that I need to be pretty liquid, intermediate duration and not subject to a lot of credit or currency risk. I have credit and currency risk in other parts of the portfolio with managers that I like, so I'm not really interested in assuming more with this sleeve.
Right now, I'm thinking about Fidelity GNMA fund FGMNX or iShares AGG, because I can get them at fidelity and don't have to hold them for 6 months without paying a $75 fee. I don't know anything about the risks of GNMA funds, other than they have prepayment risk, and I was wondering what other people thought about them. I'll probably go with AGG but I was just curious.
Comments
- GNMA funds do not provide the level of interest rate risk safety that you're expecting out of intermediate term bonds. This is because, if interest rates drop, rather than getting a boost in price, people will refinance, your bonds will be gone, and the fund will reinvest at lower yields. That is, with falling interest rates, the duration can be much lower than you think (not good in this scenario). Conversely, when interest rates rise, people hold onto their mortgages longer than projected, increasing duration (making the price of the bonds drop even more than you'd have expected) - again not good. It's because of this variable duration that MBSs have somewhat higher yield than noncallable bonds, or even bonds with fixed call dates. See, e.g. http://www.efmoody.com/investments/gnma.html
- Taking a wild guess that you're investing through Fidelity (you mentioned specifically a Fidelity fund, and you also mentioned a $75 fee, which is Fidelity's transaction fee for buying some funds) - Fidelity's short term trading fee now applies only to NTF funds purchased within 60 days, not six months. That could open up a lot more funds to you. (If you're investing with a serious likelihood of selling within 60 days, IMHO you shouldn't be looking at any intermediate term funds - much too volatile over that short time span.)
- AGG, like any total bond fund, invests across the spectrum of maturity dates. I'm not fond of that, because you get no reward on the short end, and the risk/reward on the long end is not worth it. (Generally, long term bonds are used for speculating on interest rate movements. Taxable yield curves tend to flatten out around 10 years; it is, however, different for munis.)
Fidelity's Intermediate Term Bond fund has an SEC yield virtually identical to AGG (2.04% vs. 2.08%), shorter duration (3.9 vs. 4.39), shorter weighted average maturity (4.6 vs. 6.35), and similar average credit quality (A). Not recommending this, just lining it up against AGG. There could easily be better suggestions.
msf presented an excellent summary.
If you want a fling into the mortgage bond area, I will suggest DLTNX . M* indicates an intermediate term bond fund; but the fund is currently a mortgage securties fund. Click through the ticker link to M* for performance, portfolio and related.
FRIFX is not a direct relative to a GNMA or similar bond fund; but is a conservative real estate (bonds/equity REIT) fund.
Just a few thoughts, regarding your query.
Take care,
Catch