SEC Yield

The SEC Yield of a fund is a standardized calculation of the fund's yield; this allows investors to compare funds from different issuers. For a bond fund, the yield is based on the yield to maturity, less expenses. For a stock fund, the yield is based on the dividend yield, less expenses.

Definition

Vanguard has a good informal definition [1]:

A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income, as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (in the case of bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30 day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield. The SEC yield for a money market fund is calculated by annualizing its daily income distributions for the previous 7 days.

The formal SEC definition[2] gives the official formula

${\displaystyle \mathrm {Yield} =2\left[\left({\frac {a-b}{cd}}+1\right)^{6}-1\right]}$

Where:

• a = dividends and interest collected during the past 30 days
• b = accrued expenses of the past 30 days
• c = average daily number of outstanding shares that were entitled to distributions
• d = the maximum public offering price per share on the last day of the period

It also includes clarifications of the definition. In particular, "Dividends and interest" for a bond is computed from yield to maturity, or yield to call if the bond is likely to be called, not the coupon payments on the bond.[2] The reason for the 2 and 6 in the formula is that the SEC yield is twice the six-month yield. This corresponds to the way bond yields are reported; a $1000 bond with a$10 coupon earns 1.00% every six months, and reports a 2.00% yield even though a 1.00% return every six months is a 2.01% annual growth rate.

Bond funds

For a bond fund, the SEC yield is related to the expected future total return. It will not match the return in practice, as bond prices change when their yields change, and funds do not hold bonds to maturity.

The examples in this section show how the SEC yield works with a bond trading at par and a bond trading at a premium, both with a 2.00% SEC yield.

• Bond A (par): A bond with 10 years to maturity and a par value of $1000, paying a$10 coupon every six months, with a par value of $1000 which will be paid at maturity. This bond is currently worth$1000.
• Bond B (premium): A bond with 10 years to maturity and a par value of $1000, paying a$15 coupon every six months, with a par value of $1000 which will be paid at maturity. This bond is currently worth$1090.23, calculated from the yield to maturity by compounding a 1.00% rate every six months as ${\displaystyle 15/1.01+15/(1.01)^{2}+\dots +15/(1.01)^{20}+1000/(1.01)^{20}}$.[note 1]

Similar calculations were used below to show how the value of both bonds relates to changes in their yield. A fund holding either bond would report a 2.00% SEC yield if it has no expenses, or a 1.90% SEC yield if it has 0.10% annual expenses.

If yields stay the same

Suppose that the SEC yields on both bonds remain 2.00% in six months. Bond A will be worth $1000, with a 1% return from the$10 coupon. Bond B will be worth $1086.13 = PV(1%,20-1,15,1000,0). The holder of Bond B received a$15 coupon but the bond price declined by $4.10 = (1090.23 - 1086.13), for a total return of$10.90 = (15 - 4.10), which is also 1% of the bond price (1090.23). If the yield on a bond (or on the bonds in a fund) does not change, its return over the six months is exactly half the SEC yield.