30-Day SEC Yield

The 30-day SEC yield is a standardized measure of the income a US bond fund or other income-producing mutual fund earned over the most recent 30-day period, after expenses, expressed as an annual rate. It is calculated with a formula set by the Securities and Exchange Commission (SEC), so that funds cannot flatter their yield by choosing their own method. Every figure is quoted "as of" the last day of the period, which is why the date always accompanies it.

The SEC introduced the standardized yield in 1988, when it tightened the rules on fund performance advertising. Under SEC Rule 482, a fund that quotes a yield in an advertisement must also show its total return, because yield alone says nothing about gains or losses in the price of the fund's holdings. Money market funds use a separate seven-day yield instead. Outside the US there is no single equivalent; UK and EU funds usually publish a historic or distribution yield based on income paid.

Imagine judging a rental flat by what it earned last month, after the landlord paid for repairs and the letting agent, and then saying what that would come to over a whole year. That is roughly what the SEC yield does: it takes a fund's income for the latest month, subtracts its running costs, and turns the result into a yearly rate.

It is a snapshot, not a promise. Next month's income may be higher or lower, and the value of the flat itself, like the price of the fund's bonds, can rise or fall. But because every fund must use the same recipe, it is a fair way to compare what different income funds are earning right now.

The SEC formula, set out in the instructions to Form N-1A, is:

• $a$ is the dividends and interest earned during the 30-day period.
• $b$ is the expenses accrued for the period, net of any fee waivers or reimbursements.
• $c$ is the average daily number of shares outstanding that were entitled to receive income.
• $d$ is the maximum offering price per share on the last day of the period.

The fraction gives net income per dollar invested for one month. Raising it to the sixth power compounds it over six months, and multiplying by two converts that semiannual figure into an annual rate, the same convention used for bond yields.

A fund earns $500,000 of interest in the period, accrues $100,000 of expenses, has an average of 10,000,000 shares outstanding and a maximum offering price of $10.00. Net income per dollar is $(500{,}000 - 100{,}000) \div (10{,}000{,}000 \times 10.00) = 0.004$. Then $1.004^{6} \approx 1.02424$, so the yield is $2 \times (1.02424 - 1) \approx 0.0485$, or about 4.85%.

Interest on bonds is not simply the coupon received. For most debt holdings, income is calculated from each bond's yield to maturity (YTM) based on its market value, which accounts for bonds bought at a premium or discount to par value. This makes the SEC yield closer to what the portfolio is earning today than a figure based on coupon rates.

Funds often show two versions. The subsidized yield reflects any expenses the manager has waived or reimbursed; the unsubsidized yield shows what the fund would earn without those waivers, so it is lower whenever waivers are in place. A large gap signals that the yield depends on a temporary waiver. Because $d$ is the maximum offering price, a fund with a front-end load reports a lower SEC yield than one based on net asset value (NAV); see public offering price (POP).

The SEC yield is often confused with other figures:

• Distribution yield. The income actually paid out over a recent period, often the last 12 months, divided by the share price. It looks backwards and can include one-off payments.
• Dividend yield. For a stock or equity fund, the dividends paid in a year divided by the price.
• Tax-equivalent yield. For municipal bond funds, the SEC yield grossed up to show what a taxable fund would need to earn to match tax-exempt income at a given tax rate.
• Annual percentage yield (APY). A bank deposit measure under US consumer rules, not a fund measure.

The SEC yield is useful for comparing income funds on a like-for-like basis and for seeing how a fund's earning power changes as interest rates move. It appears in fund advertisements, on the fund fact sheet and in shareholder reports.

It has clear limits. It reflects one month only, so it can change quickly. It ignores changes in the price of the fund's holdings, which matter a great deal when interest rate risk or credit risk shows up in falling bond prices. It assumes the portfolio's current YTMs are earned, which may not hold if bonds are called early or default. It is not the same as the income an investor will actually be paid, and it is not the return they will earn. For that reason it is best read alongside total return, the fund's expense ratio and the weighted average maturity (WAM) or duration of the portfolio.

• 17 CFR 230.482: Advertising by an investment company as satisfying requirements of section 10