Of all of the measurements an ETF offers for performance, income, and more, yield is arguably the most well-known. There’s a lot of nuance in yield measurements, however, and what different kinds of yields indicate about a fund, particularly income-seeking ones. Understanding what to look for as well as how to interpret the total yield picture allows advisors and investors to make educated decisions for their portfolios.
ETF Distribution Yield
The distribution yield for any ETF or product that generates income is the trailing 12-month yield for the fund. To calculate distribution yield, take the total distributions over the last 12 months and divide them by the net asset value of the fund at the end of the 12-month period.
Many issuers use an alternate method to calculate: multiply the most recent distribution by 12 and then divide by the NAV. It’s a faster method but can lead to inaccuracies and distortions, particularly if the most recent distribution is smaller or larger than the average.
While the final estimated number is often relatively close to the actual income over the last 12 months, there can be significant differences. This is particularly noticeable if the recent distribution was a non-recurring payout like a special dividend, or if distributions are irregular.
It’s also important to note that the most recent NAV used to calculate distribution yield may not be representative of the average NAV in the last year. For some ETFs and other funds that experience less volatility, this is less of an issue but for more pronounced price movements, it can lead to distortions.
See also: “NEOS ETFs Boost Income Tax Efficiency Potential for Portfolios”
30-Day SEC Yield
The SEC yield is a more current reflection of how the fund has performed recently, compared to the trailing perspective that the distribution yield can offer. 30-day SEC yield calculates the last 30 days of income earned by the fund and divides it by the NAV on the last day of the period.
The total number is then annualized and can give a better idea of how the fund performs in the current environment. It also takes into account management fees, waivers, and expenses, as well as reimbursements, but excludes capital gains and losses.
The biggest benefit of the 30-day SEC yield is its standardization, which allows for yield comparisons across funds. It’s a more forward-looking metric compared to the distribution yield, but the distribution yield can be a better indicator of fund performance in a variety of environments.
One important note for SEC yield: income calculations rely on the assumption that securities like bonds are held to maturity. At maturity, that income is expected to be reinvested. This often isn’t the case for many funds, particularly actively managed ones, and can skew annualized yield estimates.
What Dividend Yield Indicates About an ETF
It’s common to mistake distribution and dividend yields as interchangeable but they have a key difference: capital gains. A dividend yield is how much of the share price is comprised of dividends, whereas a distribution yield includes dividends and capital gains.
Dividend yield is calculated by dividing the dividend payments made in a year by the current share price. It can be a way to measure risk for companies: high dividend-yielding companies carry higher risk. In a challenging economic environment, dividends from these types of companies are often the first cut.
See also: “Income-Generating Options as the Risk Curve Changes”
Advisors and investors should also be aware of dividend value traps that can lurk amongst high dividend-yielding opportunities. It is possible to inflate dividend yield in several ways, including falling stock prices on the back of negative company news. Due diligence is necessary before investing in higher dividend-yielding companies to avoid those lacking the fundamentals to sustain their dividend yield.
By Their Powers Combined…
Individually, each yield metric for a fund can give a snapshot of performance, either backward or forward-looking. All of the types of yield together give a full picture of how well a fund generated income historically as well as income expectations looking ahead.
Understanding the limitations and pitfalls of each type of yield measurement helps advisors and investors avoid income traps and optimize income opportunities.
NEOS offers several income ETFs with exposure across the major asset classes and considerable yield through their options. The options that all three funds utilize are S&P 500 Index options that are classified as Section 1256 contracts that have favorable tax rates. 60% of capital gains from the premiums are taxed as long-term, and 40% are taxed as short-term, regardless of how long the options were held.
- The NEOS S&P 500 High Income ETF (SPYI) invests in equities via the S&P 500 and then uses laddered covered call options to generate income. SPYI has a distribution yield of 12.31% and a 30-day SEC Yield of 1.05% as of 04/30/23. Management fees are 0.68%.
- The NEOS Enhanced Income Aggregate Bond ETF (BNDI) invests in two ETFs to gain exposure to the breadth of the bond market. The fund also uses a laddered put spread strategy to generate income. BNDI has a distribution yield of 5.17% and a 30-day SEC yield of 2.04% as of 04/30/2023. Management fees are 0.58%.
- The NEOS Enhanced Income Cash Alternative ETF (CSHI) offers exposure to 90-day Treasuries and utilizes a laddered put spread strategy that refreshes weekly. CSHI has a distribution yield of 6.15% and a 30-day SEC yield of 4.37% as of 04/30/2023. Management fees are 0.38%.
For more news, information, and analysis, visit the Tax-Efficient Income Channel.