Nellie S. Huang
Kiplinger’s Personal Finance
Now that bonds offer decent yields, investors have been barreling into fixed-income mutual and exchange-traded funds. But a bond fund’s yield is just one piece of the puzzle when you’re considering an investment in the fund.
And be careful about confusing yield with income, says D.J. Tierney, a senior investment portfolio strategist at Charles Schwab Asset Management. Income is the coupon rate a bond pays—it’s the annual interest paid on a bond, and it is generally fixed throughout a bond’s lifespan. A bond’s yield, on the other hand, can be an indicator of the return an investor may receive each year over the life of a bond held to maturity, relative to the price of the bond.
Investors should think of a fund’s yield as “a starting point” when it comes to forecasting a total return, says Warren Pierson, co-chief investment strategist at Baird Asset Management. It’s no guarantee. “A lot can go wrong before a yield turns into total return,” says Pierson.
Here’s a guide to yields:
The Securities and Exchange Commission (SEC) created the standardized calculation for the SEC yield, sometimes called the 30-day yield or current yield, to allow investors to compare one bond fund to another.
“If you’re comparing two different funds, this is the yield to look at first,” says Pierson. Be wary if one fund sports a yield that’s measurably higher than that of a similar fund. “Rest assured there’s some additional risk,” he says. “You might not be able to determine what the risk is, but it’s there.”
The calculation shows investors what they would earn, after expenses, over a 12-month period if the fund continued earning the same yield for the rest of the year.
Fund companies are not even required to disclose yield, but when they do, they must use the SEC-yield calculation.
Trailing 12-Month Yield (TTM Yield)
This is the ratio of the sum of all fund distributions over the past 12 months to the fund’s net asset value at the end of the period.
The one-year look-back makes the distribution yield even more backward-looking than the 30-day SEC yield. As a result, during periods of dramatic interest rate shifts, the trailing 12-month yield can be misleading, says Tierney.
The yield to maturity of a single bond is the overall annual interest rate you will earn if you buy the IOU and hold it to maturity.
But bond funds hold dozens if not hundreds or thousands of bonds, all with different maturity dates. So it’s not a calculation that all fund firms provide. Instead, you might see an “average maturity” or “effective maturity” for the fund, listed in years. That’s the average length of time until securities held by a fund reach maturity and are repaid.
Some bonds, such as municipal, mortgage, and certain corporate bonds, are callable, meaning they can be “called in” and paid off early by the issuer before their maturity date.
Calling in a bond early can be a good tactical move for issuers. A yield to worst, then, is the lowest yield an investor can expect on a callable bond—call it a worst-case-scenario yield.
©2024 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
