There are at least five ways to evaluate the yield from an exchange-traded fund – which one are you using?
Yield measures the income an investment produces, often in the form of bond interest and dividends, over a period of time. But as with so much in investing, there are nuances, angles and subtleties to understanding ETF yields. Let’s look at five different ways of looking at yield, with an eye on finding the one most relevant to your needs:
Distribution yield: Reflects the yield you’d get if the latest quarterly or monthly distribution was consistent over the next year. This annualized payout is expressed as a percentage of the current net asset value. Focusing on distribution yield could lead to disappointment if you own an ETF that cuts its monthly or quarterly payout. If an ETF has a consistent payout, distribution yield is useful. If the payout rises, you could exceed the distribution yield.
12-month trailing yield: Reflects a yield based on actual distributions over the previous 12 months and the current share price. It’s not unusual to see a 12-month trailing yield lower than the distribution yield. This suggests that a fund has increased its payouts over the past year. Think of 12-month trailing yield as a snapshot in time and not necessarily a reflection of what your yield will be.
Yield to maturity: If you own bond ETFs, this is your best indicator of what your yield will be going forward. Yield to maturity reflects the price of all the bonds in an ETF portfolio and the coupon, or interest rate on the bonds when issued. Subtract the fund’s management expense ratio from the YTM to get a net figure.
Gross yield: Often shown in the online profiles for high-interest savings account ETFs, which hold high-yielding deposits at big banks. The gross yield is essentially the interest rate paid on the bank deposits.
Net yield: This is the yield number you want if you invest in HISA ETFs. Takes the gross yield and subtracts the management expense ratio. Some fund companies display the net yield, while others leave you to do the math.
Rob Carrick