As far as default risk, agency bonds are almost as safe as Treasury bonds. However, you get a bit of extra kick on the coupon payments. These issues lack the liquidity of Treasury funds, which explains much of the premium. They are also mortgage-backed, which means they are subject to greater volatility (due to prepayment risk) but also offer greater diversification from other bonds, such as corporate bonds.
American Century Ginnie Mae (BGNMX)
Contact: 800-345-2021; American Century Investments
Type of fund: Actively run mutual fund
Types of bonds: Intermediate-term government agency
Average maturity: 5.5 years
Expense ratio: 0.49 percent
Minimum investment: $2,500
You get better return in the long run than on a Treasury bond of similar maturity, and a tad more volatility.
Fidelity GNMA Fund (FGNMX)
Contact: 800-544-6666; Fidelity
Type of fund: Actively run mutual fund
Types of bonds: Intermediate government agency
Average maturity: 4.6 years
Expense ratio: 0.45 percent
Minimum investment: $2,500 ($500 in an IRA)
This is technically an actively run fund but pretty close to an index fund.
Vanguard GNMA Fund (VFIIX)
Contact: 800-662-7447; Vanguard
Type of fund: Index mutual fund
Types of bonds: Intermediate government agency
Average maturity: 6.8 years
Expense ratio: 0.231 percent
Minimum investment: $2,000
If you happen to have $50,000, invest in the Admiral Shares version of this fund (ticker VFIJX). Your management expenses then drop to a very delightful 0.11 percent.
Vanguard Mortgage-Backed Securities ETF (VMBS)
Contact: 800-662-7447; Vanguard
Type of fund: Index exchange-traded fund
Types of bonds: Intermediate government agency mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac
Average maturity: 5.6 years
Expense ratio: 0.12 percent
Minimum investment: None
In 2010, Vanguard issued its agency-bond ETF and chose a broad spectrum of bonds using an indexed approach. Among the handful of agency-bond ETFs, this is my favorite.