Friday December 07, 2012
by Vaughan Scully, S&P Capital IQ, The Outlook
Bond funds carry risks and sectors within the bond market go in and out of favor. But with the Fed's plans to buy $40 billion of them every month indefinitely, mortgage bonds won’t be going out of style anytime soon.
We screened almost 200 share classes of mortgage-bond mutual funds for funds open to new investors with initial minimum investments of less than $10,000 that are not designed for institutions.
We also chose funds with five star rankings (our highest buy rating) and that had net assets of at least $100 million.
Of the 10 funds that met these criteria, three stood out for having delivered strong performance over the past one, three, and five-year periods.
Vanguard GNMA Fund (VFIIX)
The Vanguard GNMA fund is a low cost option, with an ultra-low expense rate and no sales load, and as a result has become enormously popular, with $40 billion in assets across various mutual fund and exchange traded fund asset classes.
It has also outperformed its peer group over the past one, three, five and ten year periods as well as since it opened in June, 1980, returning 8.13% annually compared with 5.67% for peers. Its portfolio is correspondingly large, with almost 26,000 individual holdings.
Fidelity GNMA (FGMNX)
This fund has also been a top performer, outpacing peers over all time periods and since it opened in November, 1985. It has a large asset base, though a less diversified portfolio. Expenses are about half the peer average.
JPMorgan Mortgage Backed Securities Fund (OMBAX)
This fund is one of the best performing among all mortgage funds and the highest yielding of the three, though its expenses are higher than the others and it charges a 3.75% initial sales load.
The portfolio is fairly diverse, with almost 2,400 individual holdings and turnover is low at about 20% annually compared with 475% for peers.
Learn more about this financial newsletter at Standard & Poor's The Outlook.