Deciphering What Your Bond ETF Yields

Most investors buy bond ETFs for income, but figuring out what income you actually get from your ETF can be tricky.

ETF issuers’ websites detailing these bond ETFs offer a laundry list of different yields associated with a single strategy, and no two ETF issuers go about it the same way. There’s distribution yield; 30-day SEC yield; 12-month trailing yield; yield-to-maturity; yield-to-worst, and so on.

For example, if you bought a share of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-64)—a fund that’s hugely popular with yield-seekers—you will be faced with four different yield metrics listed on the iShares website. Which one matters to you, the investor?

Multiple Bonds, Multiple Yields

None of these yields are perfect estimates because you are not buying a single bond that matures at a specific date, which allows you to know the yield upfront. Instead, you are buying a perpetual bond fund that just keeps rolling forward tracking an index. There’s no way of knowing for sure what the yield of that portfolio will be.

Still, these yield estimates offer you some insight as to the income potential of a fund. Here’s a quick rundown of what you should know, using HYG as an example:

• Yield-to-maturity: If you want a good snapshot of what your yield would look like if you were to hold HYG long term, focus on the yield-to-maturity estimate. This is the single most useful yield estimate for individual investors, because it’s the one that tells you what yield you should expect from the junk bond market right now.

HYG currently pegs weighted-average YTM at 6.80 percent. If HYG were a single bond, that figure would be telling you that by owning that security through maturity, you would be collecting an annualized 6.80 percent in yield. In the case of an ETF, where there are several bonds with different maturities in the portfolio, the YTM is the closest estimate of how much in annual yield you would get by holding HYG.

The caveat here is that YTM does not account for expenses. HYG charges 0.50 percent in expense ratio and it trades with an average spread of 0.01 percent, putting its annual cost of ownership at about 0.51 percent. Simple math would suggest your estimated yield, once expenses are taken into account, to be 6.29 percent.

• Distribution yield: The distribution yield takes the last paid distribution and annualizes it based on the fund’s current net asset value. For example, in October, HYG paid out 40 cents in income. If you were to divide that by the net asset value, and make the assumption that you would always get that same distribution, you would get an annualized yield of 5.9 percent.

In other words, it extrapolates an annual yield based off of the most recent distribution payment. It estimates the future by looking to the most recent past. The key to remember about this metric is that distributions change all the time depending on things like number of shares outstanding, or the presence (or not) of capital gains, etc. No distribution is ever the same, so the assumption that the distribution in the past 30 days would be equal going forward is, at best, an assumption for the sake of generating an estimate.

• 30-day SEC yield: You will find this yield metric on every bond ETF website, regardless of the issuer. That’s because the Securities and Exchange Commission created this metric, and requires every fund to publish it. This is a standard formula everyone has to use in a space where each issuer has its own way of calculating yields.

As the name suggests, this yield looks at all the activity in the fund in the last 30 days. It essentially is a measure of the yields on the underlying bonds in the fund in the last 30 days, annualized. It takes into account what was distributed by the fund, what was earned by the fund, as well as expenses. HYG currently has a 30-day SEC yield of 6.69 percent.

• 12-month trailing yield: This yield is a look at the past. It tells you what you would have earned if you had bought the bond ETF a year ago. HYG currently displays a 12-month trailing yield of 5.60 percent. In other words, that figure is showing you the experience an investor had by owning HYG over the last 12 months, based on a year’s worth of distributions.

This is not at all good at telling you what your yield will be in the next year, because yields change constantly. But it’s good at showing you what happened last year.

How Do You Get Paid?

The majority of bond funds listed under the Investment Company Act of 1940 pay investors income on a monthly basis.

Most individual bonds don’t pay monthly, but semiannually. Still, an ETF wrapper sends a check to investors every month because it owns different bonds in different payment cycles. That cash can be used by the investor at will, or be reinvested in the fund.

For more on bond ETFs, see our Bond ETF Channel & Bond ETF Guide.

Contact Cinthia Murphy at [email protected].