Business Corner

Consider investing in a Ginnie Mae Fund for high yields

by Jondavid Klipp; reprinted from Small Business Tax News

Looking to get a slightly higher yield than the 5% banks are offering on savings accounts and CDs, but don’t want to take a lot of risk? Then consider Ginnie Mae securities, which are backed by the full faith and credit of the United States government and currently offer yields around 5.5%.

Ginnie Mae is short for the Government National Mortgage Association, which was established in 1968 to help encourage homeownership in the U.S. Ginnie does this by purchasing FHA and VA mortgages from banks and mortgage companies. This allows the lenders to turn the money around and make additional home loans. Ginnie Mae takes the mortgages that it has purchased and pools them together to create mortgage-backed securities that are sold to investors.

Ginnie Mae securities provide investors with a monthly income at yields that are generally higher than Treasury securities. Ginnie Mae securities are also backed by Uncle Sam. If, for example, a few borrowers with loans in a certain pool of mortgages stop paying, then the government is obligated to step in and pay investors what they are owed.

So what’s the catch? Well, if you purchase a Ginnie Mae security, you could get your principal back sooner than you want. For example, if interest rates fall and some homeowners in your pool of mortgages decide to refinance, then you’ll get some of your money back early.

So while the U.S. government guarantees your investments in a Ginnie Mae security, you can’t predict when you’ll start getting your principal investment back.

And investors should keep in mind that interest earned on a Ginnie Mae security or mutual fund is taxable.

Although Ginnie Mae securities are guaranteed by the U.S. government, mutual funds that invest in them can fluctuate in value. But the fluctuations are tiny compared to, for example, stock mutual funds.

Nonetheless, to smooth out the rare down year, I recommend that investors have a minimum three-year time frame for investing in Ginnie Mae funds. Below I highlight my two no-load mutual fund choices.

At the top of our list is the Vanguard GNMA Fund Investor Shares (symbol: VFIIX: $10.02 per share), which is currently yielding 5.23%. Since its inception in 1980, this fund has generated an average annual total return of 8.4%. Over the past 10 years, its returned 5.7% per year and over the past five years, 3.9%.

In its 23 years of operation, Vanguard GNMA has only had one down year. That was in 1994 when the fund lost 1% of its value. The fund’s performance has been helped by its minisclue expense ration of 0.21 percent. Vanguard GNMA’s expense ratio is far below the 1.1% per year average for similar funds.

The minimum initial investment in the fund is $3,000, or $1,000 for IRAs. Vanguard can be reached at 1-800-662-2739.

The USAA GNMA Fund (symbol: USGNX: $9.37 per share) currently yields 4.99%. Over the past 10 years, this fund has returned an average of 5.1% per year, while its five-year average is 3.3%.

USAA GNMA was launched in 1991 and has returned an average of 6.2% per year. Its worst year was 1999, when it lost 3.6%. The fund’s returns have been helped by its relatively small annual expense ration of 0.49%.

USAA GNMA requires a minimum initial investment of $3,000, although an IRA account can start out with only $250. For more information, call 1-800-531-8448.

Reprinted with permission of Small Business Tax News, Copyright 2007, 1-301-951-1240. This information is distributed with the understanding that the editor and publisher are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.