Need explanation of bond fund terminology/performance measures

[pigpen]

I seem to be confused about how bond funds work, exactly. Using VTIP as a specific example, which I bought shares of back in February 2022 and still hold, as of 5/20/23:

NAV = $47.60
"Yield"=5.72%
30-day SEC Yield=1.76%
Total Return = -7.4%

As I understand it, the 30-day SEC yield is retrospective for the previous month and approximates what a shareholder would earn over the next year IF the fund continues earning at the same rate (a big assumption, I know). So, how is the other yield figure derived? I'm not sure what each figure is telling me.

Also, I'm used to stock funds, where I can pretty much ignore the dividends (aside from tax considerations) because they're already baked into the NAV. So, is total return calculated the same way on bond funds? In other words, is the NAV on bond funds net of all coupon payments/sales/purchases? In still other words, what is the importance of the current yield of the fund in comparing it to other investment options? Why should I care or not care about it?

I'm afraid I'm not asking the question well, but maybe I can boil it down to the fact that I understand the yield calculation and its significance with regard to individual bonds, but not when it comes to bond funds/ETFs.

[ChpBstrd]

You are correct about the 30-day SEC yield. It's an annualized extrapolation of what the fund, or the fund's assets, yielded over the past 30d.

"Yield" is what was already paid over the past 12 mos over today's price.

NAV per share may fluctuate if your bond fund holds the cash from interest payments for a while before distributing them as dividends. This is one way stock and bond funds make a little extra money, by earning their own interest in money markets, essentially borrowing their holders' interest payments between the time the interest is paid to the fund and the time the fund pays its holders. Hence the small amount of "cash" that seems to be always present in the fund's asset allocation.

[dandarc]

A TIPS fund is more complex than a run-of-the-mill bond fund. The Inflation-Protection mechanism being the source of that additional complexity. Can't say I have much knowledge in depth on this, but found a 2 page document here that attempts to explain things:

https://www.ishares.com/us/literature/brochure/mechanics-of-tips-en-us.pdf

[pigpen]

Thanks to you both. So, looking at the following information together:

1. the current yield is 5.72%, which refers to what was already paid out during the past 12 months
2. the price of the ETF shares has dropped during the same period, resulting in an approximately 0.62% overall loss in share value

Does this yield figure (5.72%) really tell me anything especially important, then? I mean, I still lost money (on paper) overall because of the drop in share prices, regardless of what the yield was. The 30-day SEC yield seems SOMEWHAT more useful, in that it's looking at just the past 30 days, and, therefore, could be assumed to be a little more predictive.

So, maybe I should be more interested in average duration and yield to maturity?

[ChpBstrd]

It depends on what your question is. If you're asking "what yield can I expect to earn going forward?" then the 30 day SEC yield is a good estimation starting point. If you're asking whether you are in the green after accounting for dividends, I'd suggest manually adding those dividends back to today's price and comparing this sum with what you purchased the shares for. Do not attempt to account for dividends not yet paid.

TIPS really turned their whole rationale on its head during this inflationary episode. They lost more money from the rise in interest rates interacting with their own duration than their inflation adjustment could keep up with. Thus an investment sold to the public as an investment hedge failed to go up when inflation went up, because the rate hikes occurred so fast!

Definitely if you have short-term expectations for total returns from any bond fund, it makes more sense to think about duration and convexity. Both of those factors are a bigger deal than yield. Both will be important to think about if rates start falling!

[pigpen]

Thanks. I started down this road originally when it occurred to me that I might consider selling the VTIP I bought in early 2022 and just buying some of the 5+% T-bills that are available now. I'm down around 7%, though, on the VTIP, so I guess this would be a "selling low" move.

[ChpBstrd]

Thanks. I started down this road originally when it occurred to me that I might consider selling the VTIP I bought in early 2022 and just buying some of the 5+% T-bills that are available now. I'm down around 7%, though, on the VTIP, so I guess this would be a "selling low" move.

It's only selling low if the bond fund goes back up! If higher interest rates are here to stay, as Fed officials keep reminding a market that won't believe it, then those losses are locked in, done, and permanent. They are like sunk costs, and irrelevant to any future decision. If rates are destined to be cut, on the other hand, your move into similar-duration T-bills will likely pay off similarly as if you stayed in VTIP. So did you really sell, or just switched from inflation-adjusted to nominal?

[pigpen]

Why "permanent"? The share price is still driven by market forces in addition to the price/yield of the individual bonds the ETF holds, right? The YTD return is positive, despite interest rates continuing to rise. Not trying to argue, by the way, just to understand how it works.

[dandarc]

Why "permanent"? The share price is still driven by market forces in addition to the price/yield of the individual bonds the ETF holds, right? The YTD return is positive, despite interest rates continuing to rise. Not trying to argue, by the way, just to understand how it works.

Because bond prices behave predictably - when interest rates go up, then bond prices go down, when rates go down, prices go up. Basically if we're not going to get back to near-zero interest rates any time soon, there's no reason to expect the price to rebound to close to where it was.

The yield's are higher now as prevailing interest rates are higher, but that gets passed directly along to investors, so should not have an effect on the share price of a bond fund, aside from the temporary accumulation of cash before the distributions as noted upthread.

With the TIPS fund, and the still increasing but more slowly in 2023 interest rates, the inflation-principal-adjustments, plus the coupon payments, likely are now able to "beat" the price movement due to prevailing interest rate rising.

Even with a normal bond fund, total return has been positive in 2023 - at least for the short-term federal fund I pay most attention to because my church hold's some funds in it. YTD distributions have been enough to more than off-set a small decline in the share price. We're hoping to be able to hold on until we can exit the position without taking a massive loss.