Does it make sense to invest in a bond fund that has any mortgage backed securities (FNMA, GNMA, etc)?

Question

I dont want any parts of anything to do with mortgages or financial services for that matter. I am down $20K in my portfilio since last year. I am looking to minimize my losses and hold on for better times if they ever come back.

Answer 1

Things are not gonna turn around quickly in the MBS market due to a slow housing market and lack of liquidity in the MBS securities markets. However, most market participants agree that these MBS securities are trading at below intrinsic value. This is based on even the most pesimistic scenario for the housing market. So a quick answer is yes, if you already hold those securities (or mutual bond funds) in your portfolio, I would sit tight and hold for higher valuations.

The agencies MBS (Freddie, Ginnie) have much higher credit quality than the private label MBS, so if I already hold these agency MBS in my portfolio, I would not worry too much about these despite what you hear in the news. Now subprime MBS that is quite a different story...

On the other hand, if I already have a sizeable investment in this area, I would diversify a bit. How about putting some money into emerging markets funds? pharmaceutical funds? or technology funds.

Answer 2

Didn't you answer your own question?

If you don't want "anything to do with mortgages or financial services" why would you consider investing in mortgage backed securities through a fund?

Answer 3

If you don't want to invest in mortgage backed securities, then don't - problem solved.  

I do like them as a part of my overall bond portfolio, which includes TIPS & Investment Grade bonds (all at Vanguard).  With ginnie mae's, they pay 5% interest/dividend & are backed by the full faith & credit of the u.s. government.  

If you are looking to minimize losses, then put your money in cash equivalents & high quality bonds.  Tho to be honest with you, this is something you should have thought about before we entered this bear market.

Answer 4

don;t do it - the mortgage mkt is a long way from stable for investing

Answer 5

Any investment-grade corporate bond fund is going to have a high concentration of financials in it -- that's just the way that all the major indices are weighted.  The only other major issuers of high-grade corporate debt are industrials and utilities, and I'm unable to locate any mention of sector bond funds that track those.  Since you're down $20k it sounds like you have a lot of capital and you might be tempted to consider building your own portfolio of non-financial corporate debt, but that's a bad idea -- the corporate bond market is OTC and unless you're a reasonably sized player ($100,000 per individual bond at the bare minimum) you're going to get eaten alive on the prices.

If you really can't stand exposure to financials, you should probably look elsewhere to invest your money.