Trying to understand SEC yield

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Callalily
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Trying to understand SEC yield

Post by Callalily »

I'm trying to understand why the yield for the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) is 2.02% on the Vanguard website https://personal.vanguard.com/us/funds/ ... IntExt=INT but 3.51% on the Morningstar website http://quote.morningstar.com/fund/f.aspx?t=VWITX. Which one should I be looking at?
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Taylor Larimore
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Re: Trying to understand SEC yield

Post by Taylor Larimore »

Callalily wrote:I'm trying to understand why the yield for the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) is 2.02% on the Vanguard website https://personal.vanguard.com/us/funds/ ... IntExt=INT but 3.51% on the Morningstar website http://quote.morningstar.com/fund/f.aspx?t=VWITX. Which one should I be looking at?
Hi Callalily:

Morningstar gets its fund figures from Vanguard. Accordingly, I would use the Vanguard figures.

Personally, I pay little attention to bond yield except as a measure of risk. It is future (not past) total return that matters--and no one knows what that will be.

Any good-quality short- or intermediate-term Vanguard Bond Fund should provide income and relative safety in a portfolio.

Best wishes.
Taylor
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grabiner
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Re: Trying to understand SEC yield

Post by grabiner »

Callalily wrote:I'm trying to understand why the yield for the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) is 2.02% on the Vanguard website https://personal.vanguard.com/us/funds/ ... IntExt=INT but 3.51% on the Morningstar website http://quote.morningstar.com/fund/f.aspx?t=VWITX. Which one should I be looking at?
Vanguard gives the SEC yield, as required by law. Morningstar gives the distribution yield, based on what the fund actually paid out in interest over the last year.

The SEC yield is a better measure of future expected return; a bond fund with a 2.02% yield will have a 2.02% return if interest rates don't change, or if they do change but you hold the fund for a period equal to its duration.
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Kevin M
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Re: Trying to understand SEC yield

Post by Kevin M »

grabiner wrote:The SEC yield is a better measure of future expected return; a bond fund with a 2.02% yield will have a 2.02% return if interest rates don't change, or if they do change but you hold the fund for a period equal to its duration.
I don't think this is entirely correct.

You will get the SEC yield if interest rates don't change and you hold the fund long enough (period equal to duration?). Given that distribution yields generally are quite a bit higher now than SEC yields, have been for some time, and share prices have not declined to offset the higher distribution yield, we actually have been getting returns quite a bit higher than the SEC yields. I understand that over a time period equal to duration, share price should decrease enough to offset the higher distribution yield, giving you the SEC yield, but that doesn't seem to be happening over the shorter term lately.

As to the last part of the quoted statement, it is only true for a one-time or relatively quick interest rate change. To get a return equal to the current SEC yield, you must hold for a period equal to duration after each interest rate change. So, if interest rates were to rise 1% per year for 5 years (say from 2% now), I don't believe your return would be 2%/year (from today) on a bond fund with a 5-year duration. Each 1% increase in rates results in a 5% drop in value, so for the first 3 years you would lose more each year in reduced NAV than you'd make up with the higher interest rate, and doing the math in my head, I don't believe you'd make enough more in the last 2 years to even break even.

Kevin
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Captain_Video
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Re: Trying to understand SEC yield

Post by Captain_Video »

Good explanation of fund yields here:
http://online.wsj.com/article/SB1000142 ... 46756.html
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stratton
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Re: Trying to understand SEC yield

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Callalily wrote:I'm trying to understand why the yield for the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) is 2.02% on the Vanguard website https://personal.vanguard.com/us/funds/ ... IntExt=INT but 3.51% on the Morningstar website http://quote.morningstar.com/fund/f.aspx?t=VWITX. Which one should I be looking at?
The rules for SEC yield haven't been updated since TIPS came out. Both methods are "correct" as its undefined. Some TIPS fund yields will include the inflation portion of the returns and some like Vanguard don't.

Paul
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