SEC yield vs (Schwab) 7-day yield vs Bank Interest

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frankmorris
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SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by frankmorris » Thu Aug 02, 2018 5:40 pm

I've got another thread going inquiring about parking some cash temporarily, and trying to figure out how to compare yields across savings instruments: I'm seeing SEC yields. 7-day yields (Schwab), and of course traditional yields such as savings account interest rates. Obviously, rates fluctuate so my exact payment will change based on the fund's rate change, but in general are all of those rates equivalent? Are they all after expense ratios are deducted?

I've read through some previous posts on SEC yields, etc., but responses seem to get a bit technical with bond duration, etc. Just looking for a rough guide here. Thanks, as always!

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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by triceratop » Thu Aug 02, 2018 5:50 pm

One thing that may be confusing is that the computation of SEC yield differs depending on product. For money-markets, the SEC yield is a 7-day SEC yield while for most bond funds it is a 30-day one. So, your Schwab 7-day yield is likely precisely the SEC yield.
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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by frankmorris » Thu Aug 02, 2018 6:08 pm

triceratop wrote:
Thu Aug 02, 2018 5:50 pm
One thing that may be confusing is that the computation of SEC yield differs depending on product. For money-markets, the SEC yield is a 7-day SEC yield while for most bond funds it is a 30-day one. So, your Schwab 7-day yield is likely precisely the SEC yield.
Ah, that makes sense. So, am I correct in assuming that - presuming the rate stays exactly the same - my yearly interest/dividend from a $10,000 with a 2% SEC yield would be $200? I'm not trying to get overly technical and count pennies, but want to make sure I'm not leaving off any significant math when comparing funds.

Thank you so much!

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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by grabiner » Fri Aug 03, 2018 8:49 pm

frankmorris wrote:
Thu Aug 02, 2018 6:08 pm
triceratop wrote:
Thu Aug 02, 2018 5:50 pm
One thing that may be confusing is that the computation of SEC yield differs depending on product. For money-markets, the SEC yield is a 7-day SEC yield while for most bond funds it is a 30-day one. So, your Schwab 7-day yield is likely precisely the SEC yield.
Ah, that makes sense. So, am I correct in assuming that - presuming the rate stays exactly the same - my yearly interest/dividend from a $10,000 with a 2% SEC yield would be $200? I'm not trying to get overly technical and count pennies, but want to make sure I'm not leaving off any significant math when comparing funds.
This is correct in a money-market fund.

In a bond fund, your return would be 2% if rates don't change, but the dividend might not be 2%. Suppose that the fund holds a bond which was purchased years ago at its par value of $1000 with a 4% yield, and which is now one year from maturity. It is currently worth $1020, because in the next year, it will pay $40 and decline in value to $1000, for a 2% return. If you hold a fund containing this bond, the fund will report an SEC yield of 2%, but will pay you 4% and have a 2% capital loss.
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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by frankmorris » Sat Aug 04, 2018 12:21 am

grabiner wrote:
Fri Aug 03, 2018 8:49 pm
frankmorris wrote:
Thu Aug 02, 2018 6:08 pm
triceratop wrote:
Thu Aug 02, 2018 5:50 pm
One thing that may be confusing is that the computation of SEC yield differs depending on product. For money-markets, the SEC yield is a 7-day SEC yield while for most bond funds it is a 30-day one. So, your Schwab 7-day yield is likely precisely the SEC yield.
Ah, that makes sense. So, am I correct in assuming that - presuming the rate stays exactly the same - my yearly interest/dividend from a $10,000 with a 2% SEC yield would be $200? I'm not trying to get overly technical and count pennies, but want to make sure I'm not leaving off any significant math when comparing funds.
This is correct in a money-market fund.

In a bond fund, your return would be 2% if rates don't change, but the dividend might not be 2%. Suppose that the fund holds a bond which was purchased years ago at its par value of $1000 with a 4% yield, and which is now one year from maturity. It is currently worth $1020, because in the next year, it will pay $40 and decline in value to $1000, for a 2% return. If you hold a fund containing this bond, the fund will report an SEC yield of 2%, but will pay you 4% and have a 2% capital loss.
Hmm that's interesting. Guess I wouldn't complain if I received more money.

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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by grabiner » Sat Aug 04, 2018 2:14 pm

frankmorris wrote:
Sat Aug 04, 2018 12:21 am
grabiner wrote:
Fri Aug 03, 2018 8:49 pm
In a bond fund, your return would be 2% if rates don't change, but the dividend might not be 2%. Suppose that the fund holds a bond which was purchased years ago at its par value of $1000 with a 4% yield, and which is now one year from maturity. It is currently worth $1020, because in the next year, it will pay $40 and decline in value to $1000, for a 2% return. If you hold a fund containing this bond, the fund will report an SEC yield of 2%, but will pay you 4% and have a 2% capital loss.
Hmm that's interesting. Guess I wouldn't complain if I received more money.
You're not receiving more money; you are getting back some of your own money, as your principal has a lower value. You (or the fund) bought a bond for $1020, and while you received a check for $40, you also lost $20 of value. If rates don't change and you spend your whole dividend, you have permanently reduced your income stream because you now have $1000 invested rather than $1020.

It can also happen in the other direction, if rates have risen in the past. Suppose that the bond yielded 2% when the fund bought it, but yields are now 4%. The bond is currently worth $980, because it will be worth $1020 next year, but only $20 of that is paid as a dividend. If you hold a fund containing this bond, the fund will report an SEC yield of 4%, and you will get the 4% return, but you have to sell fund shares (getting your principal back from $1000 to the original $980 invested) if you want to spend 4% of your money.
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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by frankmorris » Thu Aug 09, 2018 12:51 pm

Sorry for the delay in this. So, I think I'm now more confused. So, you're saying the SEC yield is the dividend PLUS any gain in the value of the fund? Put more simply, how do I simply determine the dividend yield without having to manually calculate it manually by looking at actual monthly dividend payments? BND is an ETF, yet you're saying the yield for BND reported on Vanguard's website means something different than, say, the yield on Vanguard VTI?

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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by grabiner » Thu Aug 09, 2018 7:52 pm

frankmorris wrote:
Thu Aug 09, 2018 12:51 pm
Sorry for the delay in this. So, I think I'm now more confused. So, you're saying the SEC yield is the dividend PLUS any gain in the value of the fund? Put more simply, how do I simply determine the dividend yield without having to manually calculate it manually by looking at actual monthly dividend payments?
This is correct. In addition, the distribution yield is not consistent; a fund may sell high-distribution bonds and buy low-distribution bonds, decreasing its distribution yield even though interest rates do not change.

My point is that you shouldn't really care. Suppose that you have a bond worth $1020 which will pay a $40 coupon and be worth $1000 at maturity next year, and I have a bond worth $1000 which will pay a $20 coupon and be worth $1000 and maturity, plus $20 in cash. You get a bigger distribution, but we are in the same financial situation; we both have $1020 and will both have $1040 next year. If you spend the whole $40, the bond invaded its principal for you.
BND is an ETF, yet you're saying the yield for BND reported on Vanguard's website means something different than, say, the yield on Vanguard VTI?
Yes, that is correct. The yield on a bond is its yield to maturity, which is a well-defined number. Stock does not have a maturity, so it reports the dividend yield alone.
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Re: SEC yield vs (Schwab) 7-day yield vs Bank Interest

Post by frankmorris » Fri Aug 10, 2018 1:05 pm

Thanks Grabinar for the clarification - too bad reporting by Vanguard isn't a little more straightforward

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