Insights

Bond ETFs: Not All Yields Are Created Equal

  • The rapid rise in rates has highlighted differences across exchange traded fund (ETF) yield metrics
  • An ETF’s dividend yield may not be the most accurate measure of potential cash flow and total return
  • A bond ETF’s SEC yield more accurately reflects the underlying market’s potential
     

Head of SPDR Americas Research

Aggressive rate hikes from the Federal Reserve (Fed) continue to change the yield profiles of many fixed income ETFs. And while the impact of Fed actions have been felt more on the short end of the curve, the Bloomberg US Aggregate Index yield has soared from 1.7% at the start of 2022 to 4.36% today.1

Investors are now taking a closer look at bond ETF yields (expected returns) and that has sparked questions about how bond ETF yields differ.

What Yields Convey About Return and Cash Flow

It’s important to understand how the following common yields are calculated:

  • 30-Day SEC Yield: Calculated by taking the investment income an ETF accrued over the most recent 30-day period and subtracting expenses accrued over that same period. That figure is divided by the 30-day average of shares outstanding multiplied by the fund’s net asset value (NAV). An annualized and standard calculation developed by the SEC that all fund providers must use, it provides investors with a consistent metric to compare different funds’ yields.
  • Trailing 12-Month Dividend Yield: Calculated by taking paid dividends over the past 12 months and dividing them by the fund’s most recent net asset value per share.
  • Indicative Dividend Yield: Calculated by adding the income distributions a fund paid out to shareholders in the past month, multiplying it by 12, and dividing that figure by the fund’s NAV.
  • Yield to Worst (YTW): Measures the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. For an ETF, it is the market-weighted average yield to worst of the underlying bonds in the portfolio. For an indexed ETF, this figure should match the YTW of the index.

Since rates have increased so swiftly, some of the yield measures above are stale, creating noticeable differences between the figures.

Evaluating a Core Bond ETF’s Yield

Differences between the four yields for the SPDR® Portfolio Aggregate Bond ETF [SPAB], a fund that seeks to track the price and yield performance of the Bloomberg US Aggregate Index, are stark — and somewhat confusing.

SPAB’s trailing 12-month yield differs significantly from the yield on the index. That’s because of the lag on the 12-month yield. Meaning, it factors in dividend payments distributed by the fund back when core bonds yielded around 2% at the start of the year.

The variance with the indicative yield is less intuitive. The indicative yield takes the most recent dividend paid out and annualizes it, so that it reflects the current rate environment. But SPAB’s indicative yield reflects only paid income within the fund over the past 30 days. And it’s possible that not all the bonds in the portfolio made interest payments during that period.

More importantly, because indicative yield only reflects paid — not accrued — income, it doesn’t account for amortization and depreciation on the bonds. If a bond is bought at a discount, it is amortized until its maturity and that amortization is reflected as accrued income, not paid income.

The 30-day SEC yield, however, is based on accruals — not earned income. As a result, its accrued method better reflects any bond discounts and the potential amortization until maturity. Similarly, if bonds were trading at a premium to par, depreciation would be reflected in the 30-day SEC yield.

Therefore, the SEC yield more accurately depicts a fund’s yield on a go-forward basis, because it assumes all relevant cash flows, both, interest payments and any amortization/depreciation. That approach is similar to how the commonly quoted YTW or yield to maturity (YTM) metric for broad bond markets and bond indices is calculated. And, SPAB’s 30 day SEC-yield has more accurately tracked the YTW on the index it seeks to track, as shown below.

Both dividend yields (indicative and trailing 12-month) are more stable and perhaps better reflect the fund’s historical payments. Yet, in a period where market relevant yields have moved so swiftly, the stale nature (and confinement to earned payments) of those yields can be limiting.

The difference across all four yields is noticeably elevated right now a pure reflection of the rapidly rising rate regime and how not all yields are equal, as shown below

What Bond ETF Yield Should You Use?

Regulators tend to guide investors toward the SEC yield, as that is the standard apples-to-apples comparison. And for a bond fund, it includes all relevant cash flows to help investors analyze the investment’s potential total return. Given where we are in the rate hike cycle, it is also likely to be the most up-to-date measure.

But there are other yields investors should examine to round out the due diligence process. If you want to get an idea of how much income an ETF has paid historically, a fund’s dividend yield can provide insight. If you’re modeling paid cash flows to reach a certain earned income for your clients, the indicative dividend yield may be equally as important. And the trailing 12-month dividend yield wouldn’t be so stale, given the swift rate hikes.

These yields should be readily available on a fund provider’s website, as they are on ours. And given that the market expects additional rate hikes in 2023, doing your due diligence on ETF yields will be even more crucial.2

Want to know more? Take a closer look at yields for any of our SPDR Fixed Income ETFs.

SPAB Standard Performance Information as of September 30, 2022

 

1 Month (%)

QTD (%)

YTD (%)

1 Year (%)

3 Year (%)

5 Year (%)

10 Year (%)

Since Inception (%)

NAV

-4.33

-4.76

-14.59

-14.62

-3.32

-0.34

0.81

2.81

Market Value

-4.28

-4.74

-14.48

-14.57

-3.36

-0.34

0.82

2.80

Inception Date: May 23, 2007. Index noted is the SPDR® Portfolio Aggregate Bond ETF. Gross Expense Ratio is 0.03%. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit ssga.com for most recent month-end performance. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index. Index funds are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.


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