Confused about SEC Yield on VFSUX

[newmillionaire]

I own VFSUX. On Vanguard's vfsux page the sec yield is 4.5%. I looked at what I earned on my money this month. I then took the amount I earned this month and multiplied it by 12 months. I then took my 12 month number and divided it by my total principal in vfsux and came up with 2% on my money.

What gives? What am I not seeing? I would have done better just leaving my money in a money market account earning interest...analyzing on interest question only obviously share price is declining.

The distribution yield is 2.22% - that's a big difference between from the SEC Yield of 4.5%

Vanguard's money market distribution yield is 2.33%!

 

[newmillionaire]

https://www.bogleheads.org/forum/viewtopic.php?t=254428

Here's a good answer

 

[Freedom56]

SEC yield is a theoretical number that assumes that all bonds will be held to maturity. This will never happen in a bond fund. That number is an illusion. These bond funds hold a lot of low coupon debt that are trading well below par boosting their SEC yield but their coupon payments remain the same and therefore so are the distributions. This is why the mass exodus out of bond funds is only beginning. Bond funds are also overstating their asset values. Bonds rarely trade and some have not traded for months. Any fund that is valuing a bond based on last trade should be considered suspect.

 

[daylatedollarshort]

SEC yield is a theoretical number that assumes that all bonds will be held to maturity. This will never happen in a bond fund. That number is an illusion. These bond funds hold a lot of low coupon debt that are trading well below par boosting their SEC yield but their coupon payments remain the same and therefore so are the distributions. This is why the mass exodus out of bond funds is only beginning. Bond funds are also overstating their asset values. Bonds rarely trade and some have not traded for months. Any fund that is valuing a bond based on last trade should be considered suspect.

I don't know as much about bonds as people like you, but I have a hard time understanding how bond funds with so much previous low coupon bond holdings could possibly, suddenly have a 4.5% yield now. That just doesn't seem logical, as that is closer to current market rates.

 

[aja8888]

I don't know as much about bonds as people like you, but I have a hard time understanding how bond funds with so much previous low coupon bond holdings could possibly, suddenly have a 4.5% yield now. That just doesn't seem logical, as that is closer to current market rates.

The thing about the SEC yield is that it is complicated and devised so that it can be.

 

[Freedom56]

I don't know as much about bonds as people like you, but I have a hard time understanding how bond funds with so much previous low coupon bond holdings could possibly, suddenly have a 4.5% yield now. That just doesn't seem logical, as that is closer to current market rates.

They actually don't suddenly have a 4.5% yield. SEC yields are a mirage to cover up the reality that the true distribution yields are below money market accounts. Bond funds are not bonds. This is one reason why the exodus out of bond funds is likely to accelerate.

https://www.reuters.com/markets/eur...ggest-weekly-outflow-three-months-2022-09-30/

 

[dixonge]

that is the *worst* fund name *ever*! lol

 

[Freedom56]

that is the *worst* fund name *ever*! lol

Probably not by accident. It could have been an disgruntled Vanguard employee who wanted to warn investors.

 

[FiveDriver]

The thing about the SEC yield is that it is complicated and devised so that it can be.

This. I don't know what the SEC is measuring with that number.

Perhaps a more useful metric would provide an estimate of the monthly dividend that an investor might expect at the end of the current lunar cycle.

Should the '7-day Yield' be used as an estimate for the current month ??

 

[newmillionaire]

Thanks for all the comments! Interesting discussion

 

[COcheesehead]

I don't know as much about bonds as people like you, but I have a hard time understanding how bond funds with so much previous low coupon bond holdings could possibly, suddenly have a 4.5% yield now. That just doesn't seem logical, as that is closer to current market rates.

Yields also rise as the price of bonds fall. So all that low coupon stuff has fallen in price and thus now has a “suddenly” higher yield, but you paid the price in the NAV dropping too.

 

[daylatedollarshort]

Yields also rise as the price of bonds fall. So all that low coupon stuff has fallen in price and thus now has a “suddenly” higher yield, but you paid the price in the NAV dropping too.

I get that but it didn't seem like the SEC yields were tracking with the corresponding rise in interest rates, like they suddenly shot up even though interest rates have had a more of a steady climb this year. Maybe I misremembered what the SEC yields were a month or two ago. I know not too long ago Freedom56 pointed out the yields on BND were lower than one year Treasuries, however a 4.5% yield would now make them a fair bit higher.

 

[Freedom56]

I get that but it didn't seem like the SEC yields were tracking with the corresponding rise in interest rates, like they suddenly shot up even though interest rates have had a more of a steady climb this year. Maybe I misremembered what the SEC yields were a month or two ago. I know not too long ago Freedom56 pointed out the yields on BND were lower than one year Treasuries, however a 4.5% yield would now make them a fair bit higher.

BND has a SEC or YTM of 3.9% and a distribution yield of 2.4% which is lower than money market funds. Both are below one year treasuries. New money is never going to flow into a fund with those pathetic yields with so much downside risk, when you keep your cash in a money market fund and earn more and protect your capital.

https://investor.vanguard.com/investment-products/etfs/profile/bnd#portfolio-composition

 

[daylatedollarshort]

BND has a SEC or YTM of 3.9% and a distribution yield of 2.4% which is lower than money market funds. Both are below one year treasuries. New money is never going to flow into a fund with those pathetic yields with so much downside risk, when you keep your cash in a money market fund and earn more and protect your capital.

https://investor.vanguard.com/investment-products/etfs/profile/bnd#portfolio-composition

I just realized I was mixing up the recent yields on VFSUX and BND. My bad. But thanks, as always, for your clarifications and insights.

 

[all4j]

What gives? What am I not seeing? I would have done better just leaving my money in a money market account earning interest...analyzing on interest question only obviously share price is declining.

I’m not sure exactly what you are missing, but thought I’d point out a few things that I didn’t see mentioned. First a disclaimer – I’m not yet an advocate for buying bonds (fund or individual). They may make sense for some, but not in my situation. 2ndly, the numbers I’ll use for vfsux I gathered today 10/7 from Vanguard: distribution yield as of 9/30/22: 2.22%; yield to maturity: 4.5%; SEC yield: 4.63% (yes, it is different than ytm); average duration: 2.7 years. (on 12/31/2021 distribution yield was shown as 1.62%).

Probably the key to understanding this is understanding that the environment now is (1) rapidly rising rates & 2) high volatility. That is very different than recent past. Look closer at the metrics mentioned in that light. None of the metrics have predictive power for next month/year distribution. In a low volatility situation, they would do a better job of coming close (if you’ve used them in the past perhaps). They really can’t be used to compare different investments except for one case. SEC yield was devised due to problems using distribution yield. The SEC yield can be used to compare 2 funds at a point in time. SEC yield captured today won’t help explain performance from earlier in the year. The difference in distribution & SEC yield does give a hint for future direction. But it can’t predict future market changes.

As you likely know, when rates rise, price comes down. What you may not stop to realize is that the price change is reflected immediately. For a given bond, the coupon won’t change. But as a fund trades bonds, the different coupon may not pay out ‘immediately’. Your results may vary a good bit whether you reinvest distributions as a result.

Different points on the yield curve change at different rates. For example, look at this year & see year to date change in 3 month, 2 year, 10 year treasuries & I doubt it will be the same level of change. So yeah, in hindsight there may be investments that would have done better. Question is: is vfsux right for you going forward? I can’t answer that!

 

[newmillionaire]

This simple explanation I found seems so right. hmmm

Distribution yield is averaged over the preceding 12 months.

SEC yield is a averaged over the preceding 30 days for a bond fund and over the preceding 7 days for a money market fund.

 

[FiveDriver]

This simple explanation I found seems so right. hmmm

Distribution yield is averaged over the preceding 12 months.

SEC yield is a averaged over the preceding 30 days for a bond fund and over the preceding 7 days for a money market fund.

Thank you Sir. A simple explanation on the 16th post. And it's easy to apply to the real world we now live in. May I ask -- where did you find that ?

 

[lawman]

I too am confused by all this. The only bond fund I still hold is PIMIX..They are INCREASING their distribution..How can this be?
https://www.pimco.com/handlers/disp...7MMC9yHHKavYF9I2jRL00hShZJFSNdaNrPaIRgDPtkg==

 

[aja8888]

I too am confused by all this. The only bond fund I still hold is PIMIX..They are INCREASING their distribution..How can this be?
https://www.pimco.com/handlers/disp...7MMC9yHHKavYF9I2jRL00hShZJFSNdaNrPaIRgDPtkg==

Could be the fund is replacing bonds with low coupons with new ones with higher ones. Obviously has to do with the maturing or sold bonds in the fund.

 

[newmillionaire]

Thank you Sir. A simple explanation on the 16th post. And it's easy to apply to the real world we now live in. May I ask -- where did you find that ?

Sure, I found here:

https://www.bogleheads.org/forum/viewtopic.php?t=382848

 

[Freedom56]

"The SEC yield, also referred to as the standardized yield, is a computation that allows comparison of bond funds that fall under the jurisdiction of the Securities and Exchange Commission (SEC). It assumes that an investor holds each bond in a portfolio to maturity, the SEC yield is used to estimate the yield an investor can expect to receive based on historical returns. Moreover, the yield follows an assumption that the income made will be reinvested, and it also accounts for expenses and fees."

The assumption that a bond fund will hold a security to maturity is not even realistic. Bond fund are in a buy high and sell low mode and are selling securities at a loss. The SEC yield is an inflated number in a rising rate environment. Distribution yields are what you actually earn.

 

[all4j]

Could be the fund is replacing bonds with low coupons with new ones with higher ones. Obviously has to do with the maturing or sold bonds in the fund.

You could be right about replacing the holdings, but not so obvious to me that it is only bonds maturing/sold. I took a quick peek & fund has a lot of moving parts that I'm not taking the time to dig thru. But, did notice it is leveraged & using derivatives. My bet is they are shorting interest rates. May also be fiddling with duration, currency (fund has holdings outside US also), et al. ETFs that are inverse to interest rates are among highest performers ytd.

It may be instructive to notice this fund has a distribution yield of 5.05% and a SEC yield of 4.75% (this per pimco web site and as of 8/31; I'd expect 9/30 numbers should be available soon). So, if fund is increasing the distribution, why wouldn't sec yield be higher? Again, I didn't dig into the numbers to know how pimco calculates distribution yield, but it can vary by fund company. It can be a bit of a marketing, headline number more than some seem to think. It can be distorted by the way they handle expenses (likely here since leveraged), cap gain/loss, tips type holdings, etc. SEC yield is standardized (although still not predictive and also based on history).

 

[jazz4cash]

I have a hard time understanding how bond funds with so much previous low coupon bond holdings could possibly, suddenly have a 4.5% yield now.

They don’t.

 

[daylatedollarshort]

They don’t.

I already posted that I made a mistake in mixing up the yields between different funds in post #14, so I'm not sure what your point is.

 

[jazz4cash]

I already posted that I made a mistake in mixing up the yields between different funds in post #14, so I'm not sure what your point is.

Sorry. I’m late to this thread and must’ve missed your subsequent post.