Individual bonds and bond funds are often considered interchangeable investments. But there are important differences between the two.
All bond funds quote a yield, and in fact, most bond funds are marketed to individual investors on the basis of yield. But the yield quoted for bond funds is not equivalent to the YTM quoted for individual bonds.
Unlike individual bonds, there is no date at which the entire portfolio of a bond fund matures (with the exception of so-called target funds that invest in zero-coupon bonds). Indeed, most bond funds maintain what is known as a constant maturity. That means, for example, that if a bond fund invests in long-term bonds, then bonds are bought and sold continually to maintain a portfolio average long-term maturity—of 10 years or greater.
Since the entire portfolio of a bond fund does not have a single maturity date, bond funds cannot quote a YTM equivalent to that of individual bonds.
The yield quoted by bond funds is basically a variant of the current yield measure quoted for individual bonds. Technically, the yield quoted for bond funds is known as the 30-day SEC standardized yield. That number is calculated according to a formula determined by the Securities and Exchange Commission (SEC) and is primarily a snapshot of the dividend income (that is, the interest distributions) of the fund for the past 30 days. In addition, the 30-day SEC yield includes slight price increases (for discount bonds) or price decreases (for premium bonds) of bonds in the portfolio as they move toward par. But bear in mind, that this number is valid for the past 30 days only.
The price of a bond fund (its net asset value, or NAV) changes continually in response to changes in interest rates. Those changes may be minor for some types of bond funds; but major for many other types of bond funds. As a result, the price of any bond fund at any future date is impossible to predict.
Returns posted by bond funds for prior periods, and listed in the daily pages of newspapers, are total returns, and always include changes in the price of the bond fund (its NAV) due to changes in interest rates. But bear in mind, that these are past returns.
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