Breaking down BND (and all bond funds)

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frankmorris
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Breaking down BND (and all bond funds)

Post by frankmorris »

Folks, I have to start out with an apology. Understanding bond funds has been like understanding debits & credits - the more I learn, the less I feel like I know.

So, I'm researching my actual distribution yield from BND to try to make an apples to apples comparison with my Ally high-yield savings account. I can't, for the life of me, understand what the SEC yield is.

Here's my math:

Based on the most recent distribution a few days ago ($0.18764), I've extrapolated a current annual distribution yield of just over $2.25 per share, yielding 2.854% based on the current market price of $78.89. In contrast, the SEC yield on Vanguard's website 3.13%.

I can't figure out the discrepancy. Here are other variables I've tried to include:

• Expense Ratio: My assumption is that the SEC is inclusive of expensive ratios, so the 0.05% ER should not be factored in, but even if it is, it doesn't make up the difference
• Price Change: If I try to use a different price that the current market price (say a historical average), the resultant yield would simply drop even more as the price as gone only down most recently. In other words, using a historical price would simply result in a lower calculated yield.

Finally, if I try to understand "yield to maturity," I'm struggling to understand how that would factor into some sort of yield in a bond fund as I'm not actually receiving any sort of principal back - it's simply being returned to the fund to purchase new bonds. In that case, any sort of additional "distribution" (i.e., income received from BND) should be reflected in price, which should allow me to derive the SEC yield by using a more historical or averaged price, which again is not leading me to a more accurate distribution estimate.

BSV (short-term bond fund) is even worse: the SEC yield stated on the website is 2.82%, but my calculated distribution yield is a miserly 2.12% - a full 25% less than the stated SEC yield.

In short, I can't seem to figure out how Vanguard is getting to 3.13% as an SEC yield. Based on what numbers? I fully understand I need to look at more the today's yield when exploring investment opportunities, but having to do convoluted manual calculations just obscures daily research that much more.

Any guidance? You all are great
livesoft
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Re: Breaking down BND (and all bond funds)

Post by livesoft »

Interest rates have gone up since the beginning of 2018 and since a year ago. Here is what Vanguard tells clients about SEC yield for BND:
Image

So it appears to me the SEC yield only uses the past 30 days of income paid by bonds owned by the fund. Thus if the January SEC yield was say 1.8%, there is no way one would have gotten 1.8% nor 3.13% YTD in income annualized for the first 8 months (Jan-Aug) of 2018.

Furthermore, the last dividend calculated at the end of August does not have the September income included. That is, the SEC yield is calculated daily from the past 30 days of information.

VBTLX and BND are different when it comes to the monthly dividend in at least this way: The NAV of VBTLX does NOT include the daily accumulation of the dividend, so if one sells shares of VBTLX then the pro-rated share of the monthly dividend gets paid out to them separately at month end. However, BND embeds the daily accumulation of the dividend into the share price, so if one sells shares of BND, there is no pro-rated share of the monthly dividend paid out to them because they already got the dividend when they sold the shares.

In other words, neither the buyer nor the seller are ripped off when they trade shares of VBTLX and/or BND.
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frankmorris
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Re: Breaking down BND (and all bond funds)

Post by frankmorris »

Your response is much appreciated!
livesoft wrote: Sat Sep 08, 2018 2:48 pm Interest rates have gone up since the beginning of 2018 and since a year ago. Here is what Vanguard tells clients about SEC yield for BND:
Image

So it appears to me the SEC yield only uses the past 30 days of income paid by bonds owned by the fund. Thus if the January SEC yield was say 1.8%, there is no way one would have gotten 1.8% nor 3.13% YTD in income annualized for the first 8 months (Jan-Aug) of 2018.
I actually ignored yield-to-date yield and just focused on the current distribution divided by recent price. As price has only gone down recently, the only effect recent price changes would have had would be to indicate an even lower distribution yield.
Furthermore, the last dividend calculated at the end of August does not have the September income included. That is, the SEC yield is calculated daily from the past 30 days of information.
I don't understand this. Unless September is somehow a different month, each month should theoretically be about the same. In other word, if one month happens to see 31 days of accumulation but another sees 30, we're still looking at much smaller fluctuations than what I'm finding in actual calculated distribution yields.
VBTLX and BND are different when it comes to the monthly dividend in at least this way: The NAV of VBTLX does NOT include the daily accumulation of the dividend, so if one sells shares of VBTLX then the pro-rated share of the monthly dividend gets paid out to them separately at month end. However, BND embeds the daily accumulation of the dividend into the share price, so if one sells shares of BND, there is no pro-rated share of the monthly dividend paid out to them because they already got the dividend when they sold the shares.
This makes sense to me, but I don't think it would affect the distribution yield as any accumulation into the NAV should be reflected in price and therefore adjust the calculated distribution accordingly.
livesoft
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Re: Breaking down BND (and all bond funds)

Post by livesoft »

frankmorris wrote: Sat Sep 08, 2018 3:08 pmThis makes sense to me, but I don't think it would affect the distribution yield as any accumulation into the NAV should be reflected in price and therefore adjust the calculated distribution accordingly.
My point was that for VBTLX the accumulation is not reflected in the NAV and thus is not reflected in the price.
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triceratop
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Re: Breaking down BND (and all bond funds)

Post by triceratop »

Just a note: your post assumes that the portion of BND which is invested in instruments which pay interest less frequently than monthly are not concentrated/deconcentrated (on a yield basis) in instruments which pay in a particular month relative to August.
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Phineas J. Whoopee
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Re: Breaking down BND (and all bond funds)

Post by Phineas J. Whoopee »

Yield to Maturity, YTM, which is what yield conventionally means if not otherwise specified, and on which the SEC yield is based (notice how I specified that?), also includes reinvestment of coupons and the inevitable convergence of the bond's market price with its face value as it approaches maturity. I believe the latter is the main thing you're leaving out. Who would accept very much less, or pay very much more, than $1,000 for a $1,000 face value bond that matures tomorrow?
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Kevin8696
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Re: Breaking down BND (and all bond funds)

Post by Kevin8696 »

I completely understand your confusion... here's my understanding of the quandary.

The Vanguard site shows the Distribution yield for VBTLX based on the 8/31 distribution to be 2.78%, while the SEC yield is 3.13%. As cited above, the SEC yield uses yield-to-maturity based on the trailing 30-day period. Distribution yield uses only the current monthly income dividend paid, annualized as a percentage of the fund's average net asset value (NAV) for the past month. The conceptual difference is that the SEC yield is forward looking, and includes capital gains that are embedded in the bond portfolio, which arose from the purchase of bonds at prices below their face value.
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frankmorris
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Re: Breaking down BND (and all bond funds)

Post by frankmorris »

Kevin8696 wrote: Sun Sep 09, 2018 11:30 am I completely understand your confusion... here's my understanding of the quandary.

The Vanguard site shows the Distribution yield for VBTLX based on the 8/31 distribution to be 2.78%, while the SEC yield is 3.13%. As cited above, the SEC yield uses yield-to-maturity based on the trailing 30-day period. Distribution yield uses only the current monthly income dividend paid, annualized as a percentage of the fund's average net asset value (NAV) for the past month. The conceptual difference is that the SEC yield is forward looking, and includes capital gains that are embedded in the bond portfolio, which arose from the purchase of bonds at prices below their face value.
Thanks! So, interestingly BND doesn't include that calculate "distribution yield" as VBTLX does, which is very helpful, and probably would have cleared it up for me! Not sure why they wouldn't include this for an ETF but they would for a mutual fund?

So, is the theory that the NAV or ETF price will eventually be influenced by the capital gains distribution or maturity of held bonds over time? In other words, perhaps the value of BND is falling because the value of those underlying bonds are falling, but the fall is mitigated by accumulated capital gains over time? So, if for some reason there would be 0 market fluctuate of the bond price, you'd see the NAV/price slowly increase over time because of maturing bonds held in the fund? This would make sense to me.

I wonder why reporting distribution yields isn't more common, but thank you!
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frankmorris
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Re: Breaking down BND (and all bond funds)

Post by frankmorris »

Phineas J. Whoopee wrote: Sun Sep 09, 2018 10:40 am Yield to Maturity, YTM, which is what yield conventionally means if not otherwise specified, and on which the SEC yield is based (notice how I specified that?), also includes reinvestment of coupons and the inevitable convergence of the bond's market price with its face value as it approaches maturity. I believe the latter is the main thing you're leaving out. Who would accept very much less, or pay very much more, than $1,000 for a $1,000 face value bond that matures tomorrow?
PJW
Thank you for this - I just responded to the other post maybe indicating my understanding of what you're saying? But please correct me if I'm still off base! Thanks again
Kevin8696
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Re: Breaking down BND (and all bond funds)

Post by Kevin8696 »

frankmorris wrote: Sun Sep 09, 2018 12:48 pm
Kevin8696 wrote: Sun Sep 09, 2018 11:30 am I completely understand your confusion... here's my understanding of the quandary.

The Vanguard site shows the Distribution yield for VBTLX based on the 8/31 distribution to be 2.78%, while the SEC yield is 3.13%. As cited above, the SEC yield uses yield-to-maturity based on the trailing 30-day period. Distribution yield uses only the current monthly income dividend paid, annualized as a percentage of the fund's average net asset value (NAV) for the past month. The conceptual difference is that the SEC yield is forward looking, and includes capital gains that are embedded in the bond portfolio, which arose from the purchase of bonds at prices below their face value.
Thanks! So, interestingly BND doesn't include that calculate "distribution yield" as VBTLX does, which is very helpful, and probably would have cleared it up for me! Not sure why they wouldn't include this for an ETF but they would for a mutual fund?

So, is the theory that the NAV or ETF price will eventually be influenced by the capital gains distribution or maturity of held bonds over time? In other words, perhaps the value of BND is falling because the value of those underlying bonds are falling, but the fall is mitigated by accumulated capital gains over time? So, if for some reason there would be 0 market fluctuate of the bond price, you'd see the NAV/price slowly increase over time because of maturing bonds held in the fund? This would make sense to me.

I wonder why reporting distribution yields isn't more common, but thank you!
Out of curiosity, I took a look at the 9 distributions (8 income, 1 capital gains) made so far in 2018 in VBTLX. The average of the 8 annualized dividend distribution yields calculates to be 2.72%. When you toss in the capital gains distribution made in March, the 8 month average pops up to 3.06%. Which makes sense. This is far from a rigorous analysis, but merely a back of the envelope way of comparing yields.

Btw.... As you can see, distribution yields don't tell the whole story, which is why the SEC wants the SEC yield to be the standard.
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Phineas J. Whoopee
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Re: Breaking down BND (and all bond funds)

Post by Phineas J. Whoopee »

frankmorris wrote: Sun Sep 09, 2018 12:49 pm ...
Thank you for this - I just responded to the other post maybe indicating my understanding of what you're saying? But please correct me if I'm still off base! Thanks again
Vanguard's description of its Total Bond Market ETF, BND, does show distributions. I'm not sure what you're referring to.

Most bond funds, including Vanguard's Total Bond in all of its share class forms, do not hold bonds to maturity, because in the final bits of time their yields frequently fall below what is readily obtainable at the target average duration. That's about when short-term, and ultra-short and money market funds start buying them.

PJW
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frankmorris
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Re: Breaking down BND (and all bond funds)

Post by frankmorris »

Phineas J. Whoopee wrote: Sun Sep 09, 2018 3:40 pm
frankmorris wrote: Sun Sep 09, 2018 12:49 pm ...
Thank you for this - I just responded to the other post maybe indicating my understanding of what you're saying? But please correct me if I'm still off base! Thanks again
Vanguard's description of its Total Bond Market ETF, BND, does show distributions. I'm not sure what you're referring to.

Most bond funds, including Vanguard's Total Bond in all of its share class forms, do not hold bonds to maturity, because in the final bits of time their yields frequently fall below what is readily obtainable at the target average duration. That's about when short-term, and ultra-short and money market funds start buying them.

PJW
They do show the distributions but not the yield. It's a simple one-step calculation, but a bit annoying to have to calculate manually when researching multiple bond funds on multiple platforms.
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frankmorris
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Re: Breaking down BND (and all bond funds)

Post by frankmorris »

Kevin8696 wrote: Sun Sep 09, 2018 1:15 pm
frankmorris wrote: Sun Sep 09, 2018 12:48 pm
Kevin8696 wrote: Sun Sep 09, 2018 11:30 am I completely understand your confusion... here's my understanding of the quandary.

The Vanguard site shows the Distribution yield for VBTLX based on the 8/31 distribution to be 2.78%, while the SEC yield is 3.13%. As cited above, the SEC yield uses yield-to-maturity based on the trailing 30-day period. Distribution yield uses only the current monthly income dividend paid, annualized as a percentage of the fund's average net asset value (NAV) for the past month. The conceptual difference is that the SEC yield is forward looking, and includes capital gains that are embedded in the bond portfolio, which arose from the purchase of bonds at prices below their face value.
Thanks! So, interestingly BND doesn't include that calculate "distribution yield" as VBTLX does, which is very helpful, and probably would have cleared it up for me! Not sure why they wouldn't include this for an ETF but they would for a mutual fund?

So, is the theory that the NAV or ETF price will eventually be influenced by the capital gains distribution or maturity of held bonds over time? In other words, perhaps the value of BND is falling because the value of those underlying bonds are falling, but the fall is mitigated by accumulated capital gains over time? So, if for some reason there would be 0 market fluctuate of the bond price, you'd see the NAV/price slowly increase over time because of maturing bonds held in the fund? This would make sense to me.

I wonder why reporting distribution yields isn't more common, but thank you!
Out of curiosity, I took a look at the 9 distributions (8 income, 1 capital gains) made so far in 2018 in VBTLX. The average of the 8 annualized dividend distribution yields calculates to be 2.72%. When you toss in the capital gains distribution made in March, the 8 month average pops up to 3.06%. Which makes sense. This is far from a rigorous analysis, but merely a back of the envelope way of comparing yields.

Btw.... As you can see, distribution yields don't tell the whole story, which is why the SEC wants the SEC yield to be the standard.
Interesting - so the capital gains distribution is what adds that little extra yield. Thank you for that - very interesting indeed.
mariezzz
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Re: Breaking down BND (and all bond funds)

Post by mariezzz »

I've given up on understanding bond funds. :happy I thought about adding this to the thread on misunderstood/misused terms - a one word reply: 'bonds'.

They may be less volatile than equities, but they're more complicated to understand, in my opinion.
Kevin8696
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Re: Breaking down BND (and all bond funds)

Post by Kevin8696 »

mariezzz wrote: Mon Sep 10, 2018 4:12 pm I've given up on understanding bond funds. :happy I thought about adding this to the thread on misunderstood/misused terms - a one word reply: 'bonds'.

They may be less volatile than equities, but they're more complicated to understand, in my opinion.
MarieZZZ... Maybe try investopedia.com. They have a multi-part series on bonds and bond investing :moneybag
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