Total Return, Yield, Average Annual Performance

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manedark
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Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 9:55 am

I want to understand the difference in all three terms - Total Return, Yield and Annual Performance in context of a bond fund.

As I understand the Total Return includes dividends and any capital gains or losses for the fund.

Yield and esp SEC yield is the dividend percentage you are likely to get in future.

Average Annual Performance is the change in price of the bond fund for a year expressed in percentage.

Niw my question is that SEC yield is used as a main marker for comparing funds, why not Total Return? Wht doesn't the Vanguard site even not list it anywhere?

Thanks in advance.

alex_686
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Re: Total Return, Yield, Average Annual Performance

Post by alex_686 » Fri May 25, 2018 10:02 am

SEC yield is a high quality number. It is the forward looking expected accounting income. All funds must use the same formula in calculating it.

Total Return is what you should care about. It is the backwards looking actual economic return.

Never will the twain meet.

A good example is duration risk. Consider what happens if interest rates increase. Higher rates means a higher yield, so SEC yield increases. On the other hand higher rates means low bond prices, which means the NAV of the bond fund falls, which means negative returns. SEC yield ignores this because it is forward looking. It makes no assumptions or guesses on where the market will go. On the other hand, we can only calculate Total Return after the fact, after we know which way the market has moved.

AlohaJoe
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Re: Total Return, Yield, Average Annual Performance

Post by AlohaJoe » Fri May 25, 2018 10:24 am

manedark wrote:
Fri May 25, 2018 9:55 am
Niw my question is that SEC yield is used as a main marker for comparing funds, why not Total Return? Wht doesn't the Vanguard site even not list it anywhere?
Of course Vanguard lists the total return. What makes you think it doesn't? It is on the front page for each fund under the Performance section, with additional information on the Price & Performance tab.

dbr
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Re: Total Return, Yield, Average Annual Performance

Post by dbr » Fri May 25, 2018 10:33 am

manedark wrote:
Fri May 25, 2018 9:55 am


Niw my question is that SEC yield is used as a main marker for comparing funds, why not Total Return? Wht doesn't the Vanguard site even not list it anywhere?

Thanks in advance.
SEC yield is a current property of the fund and says something about the current property of what you are buying. Total return is not a property you can buy but rather a report on the past history of what the fund did. Current SEC yield is arguably as good a predictor of future return as you are going to get, within a range of uncertainty.

In general the main marker for comparing funds is what sort of assets the fund intends to hold, specified for example by what index an index fund tends to track. The idea that you select funds based on published data such as total return, yield, or annual performance is mistaken. You are not buying a car here based on specifications such as weight, horsepower, braking distance, etc.

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 10:50 am

alex_686 wrote:
Fri May 25, 2018 10:02 am
SEC yield is a high quality number. It is the forward looking expected accounting income. All funds must use the same formula in calculating it.

Total Return is what you should care about. It is the backwards looking actual economic return.

Never will the twain meet.
Exactly, my point. I have gathered info that SEC Yield is the gold standard for comparison between funds, but its not that simple, right, Total Return even though historical should also play a part in your decision to choose a fund.
alex_686 wrote:
Fri May 25, 2018 10:02 am
On the other hand higher rates means low bond prices, which means the NAV of the bond fund falls, which means negative returns. SEC yield ignores this because it is forward looking.
Exactly. This is what I was flummoxed with. Comparing Treasury and Munis funds from Vanguard I saw not a major difference in their SEC yields, I mean Munis didnt seem worth the risk for just 20 basis points or so, but when I went to Yahoo page to see the funds Total Annual Returns figures over the last few years - there is a much bigger difference in favor of Munis.

Thanks for clarifications in simple language.

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 10:51 am

AlohaJoe wrote:
Fri May 25, 2018 10:24 am
manedark wrote:
Fri May 25, 2018 9:55 am
Niw my question is that SEC yield is used as a main marker for comparing funds, why not Total Return? Wht doesn't the Vanguard site even not list it anywhere?
Of course Vanguard lists the total return. What makes you think it doesn't? It is on the front page for each fund under the Performance section, with additional information on the Price & Performance tab.
Where? Can you point it out in the screen-shot below for VSIGX:
Image
I assume the blue bars are just the performance of the NAV value not the total return.

lack_ey
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Re: Total Return, Yield, Average Annual Performance

Post by lack_ey » Fri May 25, 2018 10:55 am

manedark wrote:
Fri May 25, 2018 10:51 am
https://i.imgur.com/WHYXgCL.png
I assume the blue bars are just the performance of the NAV value not the total return.
Blue bars are total return performance for the periods specified. Those are annualized figures of total return.

Fund performance is always quoted by total return net of fees.

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 10:56 am

dbr wrote:
Fri May 25, 2018 10:33 am
SEC yield is a current property of the fund and says something about the current property of what you are buying. Total return is not a property you can buy but rather a report on the past history of what the fund did. Current SEC yield is arguably as good a predictor of future return as you are going to get, within a range of uncertainty.
I mostly agree with you - but the Total Return can not simply be ignored, right?
dbr wrote:
Fri May 25, 2018 10:33 am
In general the main marker for comparing funds is what sort of assets the fund intends to hold, specified for example by what index an index fund tends to track. The idea that you select funds based on published data such as total return, yield, or annual performance is mistaken. You are not buying a car here based on specifications such as weight, horsepower, braking distance, etc.
OK. But how do I, as a starting investor, know if a certain "sort of assets", e.g. Munis are really worth the risk for me in comparison to Treasuries. Are you saying it is naive to quantify that - and just assume that Munis have more risk and will generate more return that Treasuries, given the same duration?

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 11:10 am

lack_ey wrote:
Fri May 25, 2018 10:55 am
manedark wrote:
Fri May 25, 2018 10:51 am
https://i.imgur.com/WHYXgCL.png
I assume the blue bars are just the performance of the NAV value not the total return.
Blue bars are total return performance for the periods specified. Those are annualized figures of total return.

Fund performance is always quoted by total return net of fees.
Ok, so the blue bar for the 3 year - is the "annualized" return (something like CAGR, right?) for the last 3 years.
e.g. if I bought the fund for $10, in three years it fell to $9.8, but gave dividends of $0.6 in total (roughly 2% going by SEC yield).
The Total Return is 9.8 - 10 + 0.6 = $0.4 for 3 years, annualized to 3 years it would be $.133 per year, which as a percentage of original $10 gives - 1.13% - is that the figure I would see on the blue bar for 3 years?

Thanks!

lack_ey
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Re: Total Return, Yield, Average Annual Performance

Post by lack_ey » Fri May 25, 2018 11:21 am

manedark wrote:
Fri May 25, 2018 11:10 am
Ok, so the blue bar for the 3 year - is the "annualized" return (something like CAGR, right?) for the last 3 years.
e.g. if I bought the fund for $10, in three years it fell to $9.8, but gave dividends of $0.6 in total (roughly 2% going by SEC yield).
The Total Return is 9.8 - 10 + 0.6 = $0.4 for 3 years, annualized to 3 years it would be $.133 per year, which as a percentage of original $10 gives - 1.13% - is that the figure I would see on the blue bar for 3 years?

Thanks!
Hm, um... were you intending this to be exact or approximate?

Annualized meaning CAGR, yes. So a return of say 10% over 5 years would not be 2% annualized but [1.1^(1/5) - 1] * 100% = 1.92% (rounded to two decimal places). You just divided 0.4 by 3, which is equivalent to dividing 10 by 5 in the previous sentence and is thus not right.

For a total return, the dividends would be assumed to be reinvested and not just accumulated to be considered at the end. So the reinvestment price would matter, and the return would be path-dependent. Though not by a lot, considering the relatively low yield over just three years.

Finally, I think you have a typo with 1.13% and mean 1.33%, though neither figure is really correct.

But yes, doing everything properly, in three years' time, that's what we'd see for the blue bar representing the trailing 3-year annualized return.


manedark wrote:
Fri May 25, 2018 10:56 am
dbr wrote:
Fri May 25, 2018 10:33 am
SEC yield is a current property of the fund and says something about the current property of what you are buying. Total return is not a property you can buy but rather a report on the past history of what the fund did. Current SEC yield is arguably as good a predictor of future return as you are going to get, within a range of uncertainty.
I mostly agree with you - but the Total Return can not simply be ignored, right?
dbr wrote:
Fri May 25, 2018 10:33 am
In general the main marker for comparing funds is what sort of assets the fund intends to hold, specified for example by what index an index fund tends to track. The idea that you select funds based on published data such as total return, yield, or annual performance is mistaken. You are not buying a car here based on specifications such as weight, horsepower, braking distance, etc.
OK. But how do I, as a starting investor, know if a certain "sort of assets", e.g. Munis are really worth the risk for me in comparison to Treasuries. Are you saying it is naive to quantify that - and just assume that Munis have more risk and will generate more return that Treasuries, given the same duration?
Total return is what matters, but past total return is not particularly predictive of future total return. Especially not relatively speaking. And for bonds it's certainly worse than looking at more forward-looking measures like SEC yield.

One fund having a higher total return than another for some years is not necessarily (frequently not) predictive of the same going forward.

Municipal bonds of equivalent effective maturities as Treasuries are generally riskier, but the relative expected return on a pre-tax basis may well favor Treasuries. On a post-tax basis, it depends on the tax bracket. And also both risk and risk pricing vary over time.

alex_686
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Re: Total Return, Yield, Average Annual Performance

Post by alex_686 » Fri May 25, 2018 11:29 am

manedark wrote:
Fri May 25, 2018 10:50 am
Exactly, my point. I have gathered info that SEC Yield is the gold standard for comparison between funds, but its not that simple, right, Total Return even though historical should also play a part in your decision to choose a fund.
Should historical return play a part in your decision?

Past performance does not indicate future performance, or so the disclaimer says. The market is pretty much a random walk - historical performance has little future predictive power.

However it can give you hints. How well does the fund track the index? Does the manager add value - which is a active fund question. Historically what was risk-return profile like? I would take the last one with a large grain of salt - the past 10 years where not normal and will not be repeated over the next 10.

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 12:07 pm

lack_ey wrote:
Fri May 25, 2018 11:21 am
Hm, um... were you intending this to be exact or approximate?
Approximate indeed :-)
lack_ey wrote:
Fri May 25, 2018 11:21 am
Annualized meaning CAGR, yes. So a return of say 10% over 5 years would not be 2% annualized but [1.1^(1/5) - 1] * 100% = 1.92% (rounded to two decimal places). You just divided 0.4 by 3, which is equivalent to dividing 10 by 5 in the previous sentence and is thus not right.

For a total return, the dividends would be assumed to be reinvested and not just accumulated to be considered at the end. So the reinvestment price would matter, and the return would be path-dependent. Though not by a lot, considering the relatively low yield over just three years.

Finally, I think you have a typo with 1.13% and mean 1.33%, though neither figure is really correct.

But yes, doing everything properly, in three years' time, that's what we'd see for the blue bar representing the trailing 3-year annualized return.
Thanks or correcting the calculations. Good point about the "reinvestment" price!
lack_ey wrote:
Fri May 25, 2018 11:21 am
Municipal bonds of equivalent effective maturities as Treasuries are generally riskier, but the relative expected return on a pre-tax basis may well favor Treasuries. On a post-tax basis, it depends on the tax bracket. And also both risk and risk pricing vary over time.
Understood. My point was about being able to change the "May well favor" to "Will favor" or "Will not favor". Previously, in another thread I did a comparison of the SEC yields adjusted for the taxes I will pay in my brackets (only federal for Treasury and none for State tax exempt Muni). Muni was ahead but only marginally, but then I looked at the "Total Annual Returns" figures on Yahoo finance which give a totally different picture.
Are you saying that my only reliable way to compare is just the SEC yield adjusted for taxes, that is it?

lack_ey
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Re: Total Return, Yield, Average Annual Performance

Post by lack_ey » Fri May 25, 2018 12:14 pm

manedark wrote:
Fri May 25, 2018 12:07 pm
Understood. My point was about being able to change the "May well favor" to "Will favor" or "Will not favor". Previously, in another thread I did a comparison of the SEC yields adjusted for the taxes I will pay in my brackets (only federal for Treasury and none for State tax exempt Muni). Muni was ahead but only marginally, but then I looked at the "Total Annual Returns" figures on Yahoo finance which give a totally different picture.
Are you saying that my only reliable way to compare is just the SEC yield adjusted for taxes, that is it?
SEC yields adjusted for taxes would be appropriate, maybe not quite absolutely optimal but probably close enough in many cases when comparing between investment-grade funds, with the understanding that realized returns do not equal forward expected returns (a probability-weighted average over potential future outcomes) exactly and sometimes significantly so.

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 12:17 pm

alex_686 wrote:
Fri May 25, 2018 11:29 am
Should historical return play a part in your decision?

Past performance does not indicate future performance, or so the disclaimer says. The market is pretty much a random walk - historical performance has little future predictive power.

However it can give you hints. How well does the fund track the index? Does the manager add value - which is a active fund question. Historically what was risk-return profile like? I would take the last one with a large grain of salt - the past 10 years where not normal and will not be repeated over the next 10.
Thanks. How do I know the risk-return profile of a fund - is it just a "phrase" that says Risk - Average, Return - Below Average or something that can be quantified?

In any case, coming back to the original question can this be the short answer-
"Total Returns matter but can not be projected on to the future. SEC yields are future projected and are the only real quantifiable comparison point. That said, historical Total Returns can provide "hints" as to how the fund was managed, compared with index it was tracking etc., using them for anything more than that is pointless"

manedark
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Re: Total Return, Yield, Average Annual Performance

Post by manedark » Fri May 25, 2018 12:22 pm

lack_ey wrote:
Fri May 25, 2018 12:14 pm
SEC yields adjusted for taxes would be appropriate, maybe not quite absolutely optimal but probably close enough in many cases when comparing between investment-grade funds, with the understanding that realized returns do not equal forward expected returns (a probability-weighted average over potential future outcomes) exactly and sometimes significantly so.
To put it in other words - SEC yield is weighing in the current NAV of the bond fund, current dividends (current means last 30 days) , but it is not able to price in the future NAV of the bond fund - which is driven by market forces like interest rate hikes among many many other. Is that a correct way to put it?

alex_686
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Re: Total Return, Yield, Average Annual Performance

Post by alex_686 » Fri May 25, 2018 12:42 pm

manedark wrote:
Fri May 25, 2018 12:17 pm
Thanks. How do I know the risk-return profile of a fund - is it just a "phrase" that says Risk - Average, Return - Below Average or something that can be quantified?
That is a very good and complex question. Not to scare you but we are moving from a simple topic to a intermediate topic. This topic tends to devolve into the minutiae here at Bogleheads. Don't worry about this yet - focus on the big picture. Feel free to ask follow up questions but if we get too deep in the weeds we might need to open a new topic.

I define it as the inability to meet my minimum goals. Which is not the most helpful suggestion. But it should help you focus on defining your risk tolerance.

Industry standards included Standard Deviation of Returns, The Sharpe Ratio, Maximum Draw Down, and Monte Carlo Simulation. Each has its strengths, each it weaknesses.

These tools should always be used against your portfolio, not on a individual security or asset class. Often by adding a low risk low return asset - like bonds - to a portfolio we can get a better risk adjusted return.

dbr
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Re: Total Return, Yield, Average Annual Performance

Post by dbr » Fri May 25, 2018 1:10 pm

manedark wrote:
Fri May 25, 2018 10:56 am

OK. But how do I, as a starting investor, know if a certain "sort of assets", e.g. Munis are really worth the risk for me in comparison to Treasuries. Are you saying it is naive to quantify that - and just assume that Munis have more risk and will generate more return that Treasuries, given the same duration?
There are books on the subject of asset allocation and what is what. Rick Ferri has a good one and I also like Larry Swedroe. As to risk you can start with risk rating that Vanguard gives you, for example here (scroll down): https://investor.vanguard.com/mutual-fu ... file/VFICX

Estimates of risk and return are a topic of discussion and there is uncertainty, but examples of material for reference include here (also scroll down): https://portfoliosolutions.com/latest-l ... n-forecast

In general you need to acquire that data from an intent by someone to forecast returns rather than by tabulating 3,5, or 10 year published data.

It is also possible to finesse the whole issue by just investing in stocks in the total market and in bonds in a broadly diversified bond index fund and take what you get. You should avoid trying to pick and choose this nuance and that nuance among funds. Funds cannot be picked by "performance criteria." As I mentioned before you are not buying cars, a computer, or audio equipment here.

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