What does the "SEC 30-Day Yield" mean for a Bond ETF?

Question

I'm currently a student awaiting admission into grad school and have about $10,000 in a Scott Trade account ready to invest. Because I'll be using the money to pay for moving expenses and anything else that pops up not covered by my current finances (and not investing it long-term since I will most likely be withdrawing the entire amount in less than a year), I'm more interested in retaining the principal instead of looking for long-term growth - with maybe a bonus of receiving some minor income on the side.

I've been looking at ETFs, particularly Vanguard's BIV - and was wondering what the significance of the SEC 30-Day Yield (currently 1.81) is. I've read up on the difference between the SEC Yield and the Current Yield (which is about 3), so I know I should be looking at the SEC Yield for a better idea of the income I'd receive from investing into the ETF.

However, my questions are two-fold:

1. Am I looking in the right place for short-term, if basically minor, gains (should I be looking somewhere else for the amount I have for the time I have?), and

2. If I were to buy ~100 shares of BIV ($90.01), what's the significance of the SEC Yield and does it imply that I'd receive a 1.81% (~$160) payout every 30 days on the amount invested without fund expenses or broker expenses calculated in?

Thanks in advance.

Answer 1

The SEC 30-Day Yield you're seeing is a standardized yield calculation set out by the Securities & Exchange Commission. It can be useful for comparing bond funds, but it doesn't guarantee what you'll actually earn from a fund.

IMPORTANT:

The SEC 30-day yield represents a bond fund's returns from the previous 30 days expressed as an annual percentage of the current fund price — yes, an annual percentage.

In other words, don't expect 1.81% return on your money every 30 days! Such a return is too-good-to-be-true return in today's low rate environment. 1.81% per year? More reasonable.

Even then, the 1.81% you see is merely an estimate, one based on assumptions, of what you might expect to earn if you keep your money in place for the next year. The estimate is based on the assumptions that:

1. the next 12 months returns' will each be identical to the fund's return in the past 30 days, and
2. the fund price will not fluctuate.

These aren't reliable assumptions. BIV's price does fluctuate. You are not promised to get your principal back with a bond fund. Only an individual bond promises your principal back, and only at maturity.

So, earning $181 on $10,000 invested for a full year while taking on interest-rate and other risks might not be worth the trouble of putting your money in a brokerage account. You'll need to transfer the money in and out, and there are potential trading fees to take into account. (How much to buy/sell units?)

An FDIC-insured high interest savings account makes more sense.