When it comes to fixed income investing, the most common
question clients ask is, "What's the yield?" Since yield is an
important component of a bond investment's total return,
investors need to be able to answer this question in order to
accurately assess whether an investment is right for them.
To be honest, I usually answer by saying "Well, it depends on
what you want to measure." There are many different types of
yield out there, and the "right" one will vary based on the
The number of different types of yields for fixed income funds
is almost endless. If you research a particular fund, you will
often find metrics like
yield to maturity
yield to worst
yield to call
tax equivalent yield
, just to name a few. To help you understand which yield you
should be looking at, let's talk about the most common yield
metrics and how they can be used.
What it means:
This is the annual yield an investor would receive if the most
and current fund price stayed the same going forward. It's
calculated by annualizing the most recent distribution and
dividing by the fund's net asset value (
) from the as-of date.
Distribution yield measures what a fund just paid out to
investors, so it's generally a good indicator of current income.
The size of the distribution reflects the yield level that bonds
were at when they entered into the fund, because of this the
distribution yield is slow to adjust to changes in market yields.
However, as fund distributions can vary month to month, it may
not give you the best idea of what a fund has been paying out,
which is why it's also good to look at the 12-month yield.
Average Yield to Maturity (YTM)
What it means:
This yield measure represents the weighted average YTM of the
bonds in the fund as of a date, assuming that the bonds will be
held to maturity and that all coupon payments and the final
principal payment will be made on schedule. It's the only yield
measure that is gross instead of net of fees (such as the fund's
expense ratio), which means that fees should be deducted when
comparing to other yield measures.
YTM is a good indicator of what the bonds in the fund are
yielding at a current point in time. When bond yields change in
the market, the YTM on a fund also changes, and future bonds
acquired by a fund will then be acquired at current YTM rates. In
this way YTM can be a good indicator of where the fund
distribution may be headed (see below).
(for illustrative purposes only)
What it means:
This yield represents the distributions paid by a fund over the
past year. It's calculated by adding up any income distributions
over the past 12 months, then dividing that by the sum of the
most recent net asset value (
) and any capital gains distributions made over that time.
Like the distribution yield, 12-month yield is a good indicator
of the income being paid out by a fund. And since it looks at the
past year of payments, it's less affected by fluctuations in the
monthly fund distribution. 12-month yield is good for
understanding a fund's income history, or what it has paid out in
30-Day SEC Yield
What it means:
Based on the most recent 30-day period, this yield reflects the
interest earned during the period by the average investor in the
fund, after deducting the fund's expenses for the period. This is
a standard calculation developed by the SEC in order to provide
fairer comparison among bond funds. Providers may calculate other
yields differently, but every fund (except money market funds)
must follow the same formula for SEC yield.
The 30-day SEC yield is the only yield metric for which all fund
providers have to use the same calculation. As such, it's
generally considered to be the best metric to use when comparing
funds between providers.
So which yield is best? Again, it depends on what you want to
do. If I want to get a sense of how much income a fund has paid
out historically, I use the distribution or 12-month yield. If I
want to get a sense of where a fund's distributions may trend
going forward, I use average YTM (always deducting fund expenses
from it). In my experience, I've found that the actual
distribution paid out by a fund tends to be somewhere in between
the past distribution yield and the YTM.
Matt Tucker, CFA, is the iShares Head of Fixed Income
Strategy and a regular contributor to
. You can find more of his posts