What is SEC Yield?

Source: Capital Pixel

Last week I wrote a couple of posts on how you can increase yield by moving beyond money market funds and certificates of deposit (CDs).  This is important for all investors in today's market environment but especially those living on fixed income.

This post gets you started doing a little research and looks at SEC yield.

Begin by going to www.bankrate.com and check on CD rates.  This will give you your benchmarks.

Next you want to get a list of candidate exchange traded funds. Last week's posts gave a few.  To find more, just google "short-term bond ETFs."

Next, you need to do your research.  Understand that you're taking on more credit and volatility risk. Anytime you get a higher expected return or a higher expected yield, you are taking on more risk.  The alternative is to accept rates that are less than the rate of inflation.  Over a protracted period of time, this can seriously impact your investments.

For my money (great pun, huh?), the best research source is Morningstar.  Just put in the ticker symbol and you have most of the information you need.  Another good source is Yahoo! Finance, where you can get detailed price information, fund description, etc.

An important piece of information you may not be familiar with is SEC yield.  This is shown in the following table for various short-term funds along with other essential pieces of data:

Fund     Credit Quality     Effective Duration     12 mo. Yield     SEC Yield     Expense Ratio
MBB           A                          1.59 years              3.05                 3.31                .31
CSJ             A                          1.85 years              1.75                 1.26                .20
BKLN        BB                          ---                        4.86                 4.71                .76
HYS           ---                         2.47 years               ---                  4.88                .55


The SEC yield is an important data item in that it concentrates on most recent, 30-day distributions, net of expenses.  Thus, it is useful in comparing funds that have different expenses; and it doesn't mislead for the funds whose payout has been falling over the previous 12 months.  It is the yield you want to directly compare to CD yields you may be considering as an alternative.

Here is Morningstar's formal definition:

This calculation is based on a 30-day period ending on the last day of the previous month. It is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period. The figure listed lags by one month. When a dash appears, the yield available is more than 30 days old. This information is taken from fund surveys.

The table shows a wide range of ETF offerings including mortgage-backed, investment grade corporates, bank loans, and high-yield non-investment grade.

Included is just a sampling of some of the data items you would want to look at in beginning your research.  Be sure, as well, you understand how the issues in the funds behave in different markets.  For example, MBB - the mortgage-backed fund- will do very well in a stable environment as it gets the attractive yield shown.  If  yields rise sharply, however, the mortgages extend in maturity (i.e., homeowners stop refinancing, etc.).  If yields drop, then the bonds become even shorter as refinancings are faster than anticipated.  Similarly, if the economy goes into a serious recession, yield spreads on lower rated bonds will widen significantly and the funds will underperform.

My practice is to limit anything below investment grade to 2.5% of total assets.  Also, if you are doing the analysis for qualified funds, then you can just look at the yields straight up.  Otherwise, you'll want to be sure to look at them on an after-tax basis.

Disclosure:  Investors should do their own research or consult a professional before making investment decisions.  This post is for educational purposes only.