As most yield hunters pick through the various income producing exchange traded fund options, investors should be aware of the differences in the way “yield” is measured and how to optimally track yields on ETF products.
Most providers calculate yield by taking the payouts in the trailing 12 months and dividing that by the current share price, but this figure only provides you with information from the past, which may be okay with individual stocks that give stable and steady dividends, writes Daniel Putnam for InvestorPlace.
However, an ETF’s trailing 12-month yield may be misleading as the funds may reconstitute and rebalance component stocks.
If investors were to visit an ETF providers site, they may have noticed three figures:
- 12-Month Yield. The yield based on the payouts over the last 12 months.
- Distribution Yield. The yield received if the most recent distribution stayed the same in the months ahead.
- 30-day SEC Yield. This is calculated by taking the income from the last 30 days, annualizing it and subtracting fund expenses.
For stock ETFs, the trailing 12-month yield is the most accurate number to track as it provides a more averaged overview of payouts. Nevertheless, potential investors should still note that they may witness variations between the number and the actual yield. [Breaking Down a Trio of Top Dividend ETFs]
For bond ETFs, the 30-day SEC yield is the best measure as it approximates the yield if each bond in the ETF were held til maturity, which also assumes reinvestment of all income, accounts for expenses and considers the eventual dip in bonds at a premium. [Four Things You Should Know About High-Yield Bond ETFs]
All things considered, investors should still keep in mind that yields are a prediction of what will happen in the future and the figures should be taken with a grain of salt.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.