Is SEC Yield a good way to pick a bond fund?

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JustinR
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Is SEC Yield a good way to pick a bond fund?

Post by JustinR » Thu Dec 07, 2017 5:28 am

I don't really understand the SEC Yield. People recommended looking at that metric when comparing bond funds.

For example:
STIP (iShares 0-5 Year TIPS Bond ETF)

Code: Select all

SEC Yield: 5.55%

1yr: 0.47%
3yr: 0.57%
5yr: 0.11%
Inception: 1.02%

Huh? How are the past returns so low but the SEC Yield so high?

Should I expect to receive 5.55% returns?

How should I use SEC yield when comparing funds?

Should I use a different metric?

livesoft
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Re: Is SEC Yield a good way to pick a bond fund?

Post by livesoft » Thu Dec 07, 2017 7:40 am

TIPS funds have other things going on, so I don't think one would use SEC yield. I wouldn't buy TIPS funds anyways.
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oldcomputerguy
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Re: Is SEC Yield a good way to pick a bond fund?

Post by oldcomputerguy » Thu Dec 07, 2017 8:06 am

SEC yield is calculated over the past 30 days. In a case of moderate to high volatility, it’s not impossible for the yield over the past 30 days to be way out of whack compared to long-term yields.The share price of STIP took a bit of a dip over the past month,so it’s not that surprising that yield is up (remember, bond prices and yields move in opposite directions).
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Re: Is SEC Yield a good way to pick a bond fund?

Post by Call_Me_Op » Thu Dec 07, 2017 8:12 am

The answer to the question "Is SEC yield a good way to pick a bond fund" is NO. There are many considerations. Yield is generally proportional to risk. One should decide what types of bonds they want to hold and select a low-cost diversified fund that holds these types of securities.
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Nekrotok
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Re: Is SEC Yield a good way to pick a bond fund?

Post by Nekrotok » Thu Dec 07, 2017 8:45 am

Generally, you need to consider yield, duration, and risk to value bonds. For the yield part, there are a number of yield metrics but SEC yield is probably the best to use.

Anyways, this is bogleheads so the way to pick a good bond fund is to pick a total market index with low expenses. Maybe pick a tax-exempt bond index if you're going to be taxed on it at a high rate. Don't bother with trying to pick bonds or bond funds. There are way smarter people already pricing them efficiently so there are no free gains to be found.

dbr
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Re: Is SEC Yield a good way to pick a bond fund?

Post by dbr » Thu Dec 07, 2017 9:51 am

Yes, pick a type of fund based on duration and credit risk mostly, perhaps deciding if one wants TIPS or not, and dismiss the idea that there are "metrics" that can be used to sort out "good picks" from "bad picks."

Thesaints
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Re: Is SEC Yield a good way to pick a bond fund?

Post by Thesaints » Thu Dec 07, 2017 10:54 am

Everything else being equal, yes. SEC yield is a good criterion.

In the case of TIPS, the SEC yield is calculated assuming future inflation is equal to past inflation. Obviously that is not necessarily true.

Chuck
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Re: Is SEC Yield a good way to pick a bond fund?

Post by Chuck » Thu Dec 07, 2017 11:14 am

Vanguard gives the SEC yield of TIPS funds without the inflation component. (Footnote G) This is (IMO) a superior way to do it. You can come up with your own estimate for future inflation and apply it yourself. For iShares, you'd have to look up what assumption they are making.

Here's a WSJ article that I can't read, but the headline looks good:
https://www.wsj.com/articles/SB10001424 ... 3576172904

JustinR
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Re: Is SEC Yield a good way to pick a bond fund?

Post by JustinR » Thu Dec 07, 2017 6:47 pm

Chuck wrote:
Thu Dec 07, 2017 11:14 am
Vanguard gives the SEC yield of TIPS funds without the inflation component. (Footnote G) This is (IMO) a superior way to do it. You can come up with your own estimate for future inflation and apply it yourself. For iShares, you'd have to look up what assumption they are making.

Here's a WSJ article that I can't read, but the headline looks good:
https://www.wsj.com/articles/SB10001424 ... 3576172904
Wow, GREAT article. It even addresses iShares, which is the fund I linked.
Given the way many TIPS funds interpret the SEC yield formula, the change in inflation over the latest reported month gets added to interest income to produce an annualized figure. Thus, in months that capture a small inflation change, SEC yields on TIPS funds will be low. In months like April, when the rise in the Treasury's inflation value was about 0.5%, SEC yields can brush 6%.

The inflation change upon which TIPS funds will be basing their SEC yields in May will be nearly 1%, notes Dan Dektar, chief investment officer at Smith Breeden Associates in Durham, N.C. That suggests some funds might soon sport much higher yields.

A few brave TIPS funds back the inflation adjustment out of the SEC yield, producing a much smaller number often called "real yield."

"It hurts us in a sense," says Ken Volpert, head of taxable bonds at Vanguard Group. "But at least we're not getting people making misjudgments based on unsustainable yields." At iShares, the website displays four additional types of yield calculations on its TIPS portfolios—most of them considerably lower than the SEC number. "Investors need to understand what yield they're getting," says Matt Tucker, a managing director at iShares.
STIP's SEC yield: 5.32%
STIP's "real yield" ("The return from an investment adjusted for the effects of inflation"): 0.30%

Summary of the article: SEC yield doesn't work for TIPS funds.
The bottom line: While the SEC yield is a decent guide in other bond funds, it can steer you wrong in an inflation-protected bond fund. Before buying a TIPS fund, ask instead what its real yield is.

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Taylor Larimore
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Re: Is SEC Yield a good way to pick a bond fund?

Post by Taylor Larimore » Thu Dec 07, 2017 7:15 pm

Is the SEC Yield a good way to pick a bond fund?
JustinR:

Yes, but not in the way most people think.

High bond yields and high bond risk are strongly correlated.

Bonds in a portfolio are used primarily for safety when stocks decline. Higher yielding stocks nearly always fall the most when stocks decline. For example, when Vanguard's 500 Index Fund plunged -37% in 2008, their Hi-Yield Bond Fund ALSO fell -21%. Compare this with the 2008 gain of +5% for the comparative low-yielding Total Bond Market Index Fund.
More money has been lost by investors seeking "hi-yield" than has been lost at the point of a gun. -- Raymond F. DeVoe, Jr., of Legg Mason
Best wishes.
Taylor
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