Hi - I'm trying to choose a bond fund and I'm struggling to understand the numbers provided on the bond's information page.
For example, I'm looking at the Fidelity Intermediate Bond Fund (FTHRX) page and it gives the following information:
30-day yield 9/30/24 4.0%
Yield to Worst 9/30/24 4.4%
Distribution Yield (daily) 10/28/24 3.49%
Weighted Average Coupon 9/30/24 3.9%
I have clicked on "show glossary" for each, but it might as well be a foreign language. I would like to know what's the bottom line. Which number is the percent interest the fund gives me, or is it not that simple? If someone could please explain this to me I'd be grateful.
Also - for those bond funds that give a "tax equivalent yield," what tax bracket are they assuming? Wouldn't the number they give for that depend on your particular tax bracket?
Thank you.
Struggling to understand bond fund info
Struggling to understand bond fund info
Last edited by Pops1860 on Wed Oct 30, 2024 10:34 am, edited 1 time in total.
Reason: Topic moved to the “Personal Investments" forum. Moderator Pops1860
Reason: Topic moved to the “Personal Investments" forum. Moderator Pops1860
Re: Struggling to understand bond fund info
This is a good resource to digest: https://www.bogleheads.org/wiki/Bond_basics
There is no rush. Focus on understanding what you are buying and why you are buying it. Basically, when buying a bond fund, you are buying a set of promises companies and governments make to pay back a loan at some point in the future. The value of that promise will change over time for market reasons, so the share price will change accordingly. Unless the entity taking out the loan defaults, the buyer will always receive a regular payment for holding the bond until the term is up (maturity), but the real value of that payment will shift due to inflation. Adding further complexity, bond funds are buying and selling individual bonds all the time and don't usually hold individual bonds to maturity, so the maturity you see on a fund is a rolling average of the current holdings.
For many people, Bogleheads tends to recommend a medium-term bond fund such as the one you are looking at.
Generally, the presence of a bond fund in a diversified portfolio reduces volatility of the total portfolio. The share price and % yield of a bond fund can fluctuate year to year just like a stock, sometimes a LOT when the federal reserve is modifying interest rates. But over time, bonds historically reduce volatility.
Bond funds:
-fluctuate in share price just like stocks
-are risk investments
-are not "for safety" - they are an investment that can have a role in your portfolio if it makes sense for you. For example, between 2000-2010, a portfolio of 60% SP500 and 40% FTHRX would have outperformed a portfolio of 100% SP500. Between 2020 and 2024, the opposite happened. Neither is "right" - it depends on your time horizon and goals for your portfolio.
There is no rush. Focus on understanding what you are buying and why you are buying it. Basically, when buying a bond fund, you are buying a set of promises companies and governments make to pay back a loan at some point in the future. The value of that promise will change over time for market reasons, so the share price will change accordingly. Unless the entity taking out the loan defaults, the buyer will always receive a regular payment for holding the bond until the term is up (maturity), but the real value of that payment will shift due to inflation. Adding further complexity, bond funds are buying and selling individual bonds all the time and don't usually hold individual bonds to maturity, so the maturity you see on a fund is a rolling average of the current holdings.
For many people, Bogleheads tends to recommend a medium-term bond fund such as the one you are looking at.
Generally, the presence of a bond fund in a diversified portfolio reduces volatility of the total portfolio. The share price and % yield of a bond fund can fluctuate year to year just like a stock, sometimes a LOT when the federal reserve is modifying interest rates. But over time, bonds historically reduce volatility.
Bond funds:
-fluctuate in share price just like stocks
-are risk investments
-are not "for safety" - they are an investment that can have a role in your portfolio if it makes sense for you. For example, between 2000-2010, a portfolio of 60% SP500 and 40% FTHRX would have outperformed a portfolio of 100% SP500. Between 2020 and 2024, the opposite happened. Neither is "right" - it depends on your time horizon and goals for your portfolio.
Re: Struggling to understand bond fund info
It's not that simple, alas.Hazel802 wrote: ↑Wed Oct 30, 2024 10:12 am Hi - I'm trying to choose a bond fund and I'm struggling to understand the numbers provided on the bond's information page.
For example, I'm looking at the Fidelity Intermediate Bond Fund (FTHRX) page and it gives the following information:
30-day yield 9/30/24 4.0%
Yield to Worst 9/30/24 4.4%
Distribution Yield (daily) 10/28/24 3.49%
Weighted Average Coupon 9/30/24 3.9%
I have clicked on "show glossary" for each, but it might as well be a foreign language. I would like to know what's the bottom line. Which number is the percent interest the fund gives me, or is it not that simple? If someone could please explain this to me I'd be grateful.
30-day yield is also known as SEC yield. It uses a formula to estimate a future-looking yield. This is a standardized yield to help facilitate comparison.
It's helpful when comparing funds of similar characteristics. If you're looking at all possible bond funds, don't simply pick the one with the highest SEC yield -- you should not ignore a fund's credit risk (Treasury versus muni versus corporate versus high yield), or ignore the duration.
Distribution yield is what actually was distributed. No guarantee this yield will continue in the intermediate or long term. In the very short term it's likely the next yield will be somewhat similar if (presuming) the fund's bond holdings don't turnover frequently.
Edited to add: welcome to the forum!
Last edited by sycamore on Wed Oct 30, 2024 12:21 pm, edited 1 time in total.
Re: Struggling to understand bond fund info
I would look at expense ratio (ER), average duration, average credit quality, and SEC yield.
Re: Struggling to understand bond fund info
Yes, the TEY for you depends on your tax situation. Fidelity can't know everyone's tax situation so they assume certain situations. All the brokerages and fund managers do something similar.
Example from Fidelity Intermediate Municipal Income Fund:
Here's what Fidelity says about TEY.
Tax Equivalent Yields
The interest rate which must be received on a taxable security to provide the holder the same after-tax return as that earned on a tax-exempt security.
For national funds, tax-equivalent yields (TEYs) are calculated by first dividing that portion of a fund's yield that is tax-exempt by (one minus the specified federal tax rate) and then adding that amount to the portion, if any, of the fund's yield that is not tax-exempt.
For state-specific funds, TEYs are calculated by first dividing (i) that portion of a fund's yield that is tax-exempt reduced for the potential effect of state income tax on the income from out-of-state bonds by (ii) one minus the combined federal tax rate indicated and the state tax rate associated with the upper income limit of that federal tax bracket. Then that amount is added to the portion, if any, of the fund's yield that is not tax-exempt.
TEYs do not reflect tax credits, exemptions, limits on itemized deductions (except as described in the subsequent sentence), or federal and/or state alternative minimum taxes. For state-specific funds, TEYs also assume investors are state residents and would not be able to take an itemized deduction on their federal returns for state taxes on investment income (i.e., TEYs assume investors are already taking the maximum itemized deduction for state taxes and thus would not get an increased deduction for state taxes paid if invested in a taxable security). For NY funds, TEYs also reflect NYC income taxes and treat them the same as state taxes, but do not reflect the NY state tax rates that apply to income in excess of $5 million. For MD funds, TEYs also reflect the highest city/county tax rates in MD and treat them the same as state taxes.
TEYs calculated for the two highest federal tax brackets (37% and 35%) include the 3.8% Medicare surtax that applies to net investment income above certain thresholds and thus the two highest federal tax rates are shown as 40.8% and 38.8%. Although some taxpayers in the 24% and 32% brackets may also be affected by the 3.8% Medicare surtax, TEYs calculated for the 24% and 32% brackets do not include the 3.8% Medicare surtax.
Consult a tax professional for further detail.
Re: Struggling to understand bond fund info
Thank you for your responses! The information given is very helpful and it's making more sense now. I think I'll stick with the Fidelity US Bond Index Fund, FXNAX.
Thank you very much.
Thank you very much.
Re: Struggling to understand bond fund info
Given given bond prices are inverse of yields, funds like FTHRX and BND consist of bonds of duration more than 1 year, and there was a fed rate cut on 9/19/24 with likely a consensus rates will drop further, what explains the 1.8% drop in FTHRX and 2.7% drop in BND price from 9/30 - 10/30? Less demand for bonds with declining rates, so lower prices as the market seeks higher yield elsewhere? TIA.