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Bond Fund Yields

We often find that investors are unsure about the yield on their bond fund investments, and how much they should expect to receive in income from their investments.  Recently, the research team at Morningstar published an article on how to measure a bond exchange-traded fund‘s (ETF) income.  We thought the article had some helpful insights on how to measure income, so we’ve included some of the highlights below.

While it’s easy to see the shape of the U.S. Treasury yield curve, it’s not as intuitive to find the yield on a bond ETF. Here’s a guide to some of the different yield calculations, when they should be used, and some context on current market conditions.

Yield Definitions

A table showing the definitions for SEC Yield and 12-Month Yield

SEC Yield

The SEC yield is calculated by taking the income that has accrued over the past 30 days and assuming this will continue for the next 12 months. The main draw of this calculation is that it gives an accurate picture of the current income of the fund. This methodology is standardized by the SEC and allows for fair comparisons between funds, but it doesn’t capture how a manager’s recent portfolio adjustments or recent changes in bond prices might affect a fund’s future yield.

12-Month Yield

The 12-month yield adds up all the distributions over the past 12 months and divides that number by the fund’s ending period net asset value. This indicates the income investors actually received in the fund, not just a hypothetical calculation of the future return. If a fund has an inconsistent or volatile income stream, the 12-month yield will smooth out the distributions into a more realistic expectation of total income for the next year. However, if interest rates rose or fell during the previous year, the income received 11 months ago will be higher or lower than the current portfolio and could provide an inaccurate picture of what investors can expect going forward.

Which Is the Better Data Point?

It depends! No single yield calculation is perfect, so instead of thinking one is better than the other, these two figures can be used in tandem. Because the 12-month yield measures the actual distributions provided by a fund over the past 12 months, it is the more “concrete” figure but also more backward-looking. SEC yield, on the other hand, can be used to approximate what a fund’s income will be in the future, with the caveat that a fund’s income can change based on market moves or portfolio adjustments. Taken together, a 12-month yield shows what a fund’s income has been, whereas an SEC yield shows where it may go. The chart below gives a demonstration of this phenomenon:

Pimco Enhanced Maturity ETF's Income

A chart showing PIMCO Enhanced Maturity ETF's SEC Yield and 12-Month Yield over a roughly three-year period.

Over most periods, Pimco Enhanced Short Maturity ETF MINT has seen its SEC yield “lead” its 12-month yield. When its SEC yield trends downward, its 12-month yield follows it down; conversely, when its SEC yield trends upward, its 12-month yield follows it up at a lag. 

Please let us know if you have any questions about this blog post or general questions about generating income in your portfolio.

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