Understanding Bond ETF Yields

If you get a quote for the iShares Canadian Short-Term Bond ETF from Yahoo Finance, GlobeInvestor, or some other financial website, it will show the annual yield as being close to 4%. That may seem strange because annual yields on individual short-term bonds are currently quoted at 1.5% to 2.5% per year.

It’s not so strange when one realizes the yields are two different beasts. The ETF yield on financial websites is based on income distributions from the last four quarters. The yield on individual short-term bonds is the yield to maturity – i.e. what one would get if they held the bond to maturity.

As I understand from talking to Heather Pelant of Barclays Canada’ iShares, anyone considering purchasing the short-term bond ETF needs to check its yield to maturity. This is available from the iShares.ca website. It currently says the “weighted average yield to maturity” for the ETF is 2.1%.

Comments

[Alan Young:]

This is an important question, applicable to every bond fund, which requires much more explaining. If the average coupon is 2%, where does the other 2% of yield come from? Currency variation? Capital gain realized from older maturing bonds? Leverage?

It's essential to be able to parse this information to make any kind of risk/benefit assessment of these funds. Looking up the "yield to maturity" simply supplants one misleading statistic with another. Sadly, you have not only failed to explain the problem fully, you don't tell us how to find the information.

Oct 04 04:59 AM

[The Cecil:]

It's much more complicated than a single blog post could contain. The various financial sites don't always report the same numbers for dividend and yield. Computing yield to maturity yourself with a calculator or a spreadsheet is a good but very frustrating way to learn. You really have to read the prospectus of the Fixed Income ETF to understand how they really work for a buy and hold investment. If you're trading then you pay attention to different information.

Oct 04 09:15 PM

[Fridge Magnate:]

Larry:
Your article leaves more questions than answers. The distribution for XSB is about 29 cents every 3 months. Based on a unit price of about $29, that is 1% per quarter = about 4% per year. If I am missing something, please enlighten me.


On Oct 04 04:59 AM Alan Young wrote:

> This is an important question, applicable to every bond fund, which
> requires much more explaining. If the average coupon is 2%, where
> does the other 2% of yield come from? Currency variation? Capital
> gain realized from older maturing bonds? Leverage?
>
> It's essential to be able to parse this information to make any kind
> of risk/benefit assessment of these funds. Looking up the "yield
> to maturity" simply supplants one misleading statistic with another.
> Sadly, you have not only failed to explain the problem fully, you
> don't tell us how to find the information.

Oct 04 09:16 PM