What a comparison of a fund's trailing 12-month and SEC yields can tell us.
We recently started displaying the 30-day SEC yield for funds, in addition to the trailing 12-month yield. Whereas a fund's TTM yield is based on its distributions over the trailing 12-month period, its SEC yield is based on what the securities in its portfolio are yielding closer to present day.
Neither figure is an indicator of a fund's future income-generating potential. A fund's past income returns, distribution history, and net asset value growth or erosion may shed more light on that potential, but even those factors should not be viewed as predictive. Even so, the comparison of a fund's TTM and SEC yields is arguably more useful than looking at either one in isolation. While both yields reflect income generated by bonds, dividend-paying stocks, and other securities, the SEC yield is mandated for any fund that reports its yields--thus providing a standardized approach to a difficult calculation. An increasing number of firms are providing both figures for investors and to Morningstar. Debate over the minutia of each calculation is beyond the scope of this article. Instead, we'll provide a glimpse into what a comparison of a fund's TTM and SEC yields can reveal.
The Road Behind You Is Part of the Road Ahead
No single yield calculation tells a fund's full story. Many investors focus on a fund's distribution yield, calculated by taking the fund's distributions over the trailing month, annualizing that figure, then dividing it by the fund's average NAV. That's a decent gauge of what a fund has paid out, but lumpy distributions or big changes in NAV can result in significant monthly swings in a fund's distribution yield. To help smooth that out, TTM yield is calculated by summing a fund's actual distributions over the previous 12 months and dividing that number by the fund's ending-period NAV. TTM yield is a better rear-view mirror, 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.
The 30-day SEC Yield calculation is more complex (click here and search for "30-day"). While it represents the investment income per share that a fund's portfolio earned during the trailing 30-day period after expenses, it doesn't reflect what a fund may have actually distributed to fund shareholders. Think of the SEC yield as a pair of side-view mirrors to complement the rear-view mirror.
Adjust Those Mirrors
For our comparison, I screened the United States open-end fund universe for funds that are above $2 billion in assets, have a Morningstar Analyst Rating, and report both TTM and SEC yields. That screen resulted in a list of roughly 300 funds. In this initial article, I'll focus on a handful of intermediate-term bond, multisector-bond, municipal-national intermediate, and high-yield municipal-bond funds. In a follow-up piece, I'll dig into a selection of equity and asset-allocation funds. Where possible, I'll add a few ETFs that investors also can use to gain exposure to those slices of the market. The mix is by no means comprehensive, but it gives us a good starting point.
To make a better comparison across the funds, I calculated each fund's SEC yield as a percentage of its TTM yield (SEC yield divided by TTM yield). Where that figure is close to 100%, the difference between the fund's two yields is narrow, meaning there's not much difference between what the securities in a fund's portfolio are yielding today and what its distributions over the trailing 12-month period have been. There can be--and often there is--a disconnect between the two yields, because SEC yield is an accounting convention for measuring the income that a portfolio is generating, while TTM yield is a measure of how the fund has managed the distribution of that income. Seeing an SEC yield that's higher than a fund's TTM yield does not necessarily mean the fund will be paying out higher distributions going forward, and a TTM yield that's higher than the SEC yield doesn't necessarily mean a fund will be able to sustain those distributions going forward.
The percentage itself is neither good nor bad. Recent, sizable market movements may cause the figure to move away from 100%, as we'll see with many of the funds discussed below. A manager's portfolio adjustments also may cause the figure to shift. If that percentage stands out from peers, it's worth digging into the fund's portfolio to see what's going on. For instance, a bond-heavy fund that's been able to keep that figure close to 100% over the past year as yields have continued to fall may have taken on more credit risk or interest-rate risk in order to keep its yield relatively high.
Intermediate-Term Bond Funds: Low Yields Are Closer Than They Appear
It's no secret that global governments' quantitative easing, low interest rates, massive bond-fund inflows, and some yield-chasing have driven bond yields lower. The table below reflects that trend, with the intermediate-term bond category's average SEC yield weighing in at 63% of its TTM yield. Our selected funds weighed in at 41% to 90%: