What Are the Best Agency Bond Funds? - dummies

What Are the Best Agency Bond Funds?

By Russell Wild

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.