Thanks everyone for the responses....
I got that formula from Rob Berger's "Cash vs Bonds in Retirement"(https://www.youtube.com/watch?v=eNNEZaH38ho) video (starting @ Time 8:23),
he states .."you can think of duration (6.5 years for BND) as sort of weighted average time to get your money back", considering distributions along the way, with an effective maturity of 8.9 years.
Rob then gives an example (BND, at the time) of using the effective duration of 6.56 years (the time to get your money back), to get "a rough estimate of how this fund will perform" by multiplying 6.5 times 12, minus 1 to equal 12, which as a "very rough rule of thumb", & "over the next 12 years a lump sum investment in this fund will return it's current yield (highlighting the SEC yield of BND), of roughly 4.09%"
Which leads me to another question: How accurate / useful are the SEC yields, and what assumptions do they make regarding distributions, and interest rates? Currently the SEC yields for these 3 Bond ETF's are similar (from 4.3% - 4.7%) despite different duration(s). My guess is that it's only useful for comparing different funds, but not useful for estimating returns going forward. I could be wrong about that...
From investopedia: The SEC calculation shows investors what they would earn in yield over the course of a 12-month period if the fund continued earning the same rate.
Maybe I'll stick to homegrown Bond ladders, but that seems overly complex.
Thanks Beensabu, that helps a lot.It's a general rule of thumb, to help people understand how increasing duration increases volatility. Here's a chart that is more accurate:
... 'if rates went up a a steady pace'. Could you elaborate?and is it true that:
"you can get a rough estimate of how many years, bond will pay the SEC yield by using the formula:
(bond duration times 2) minus 1"?
No. That is the formula for how long it would take you to get your initial investment back if rates went up at a steady pace for the entire stated duration of a bond fund.
I got that formula from Rob Berger's "Cash vs Bonds in Retirement"(https://www.youtube.com/watch?v=eNNEZaH38ho) video (starting @ Time 8:23),
he states .."you can think of duration (6.5 years for BND) as sort of weighted average time to get your money back", considering distributions along the way, with an effective maturity of 8.9 years.
Rob then gives an example (BND, at the time) of using the effective duration of 6.56 years (the time to get your money back), to get "a rough estimate of how this fund will perform" by multiplying 6.5 times 12, minus 1 to equal 12, which as a "very rough rule of thumb", & "over the next 12 years a lump sum investment in this fund will return it's current yield (highlighting the SEC yield of BND), of roughly 4.09%"
Which leads me to another question: How accurate / useful are the SEC yields, and what assumptions do they make regarding distributions, and interest rates? Currently the SEC yields for these 3 Bond ETF's are similar (from 4.3% - 4.7%) despite different duration(s). My guess is that it's only useful for comparing different funds, but not useful for estimating returns going forward. I could be wrong about that...
From investopedia: The SEC calculation shows investors what they would earn in yield over the course of a 12-month period if the fund continued earning the same rate.
Maybe I'll stick to homegrown Bond ladders, but that seems overly complex.
Statistics: Posted by AnothERetire — Wed Jul 24, 2024 1:34 pm — Replies 6 — Views 514