Are Reported Mutual Fund Yields Useful? An Analysis of Municipal Bond Funds

Abstract

Bond funds report both a distribution yield and a SEC yield, which are roughly analogous to the current yield and yield to maturity on an individual bond. We analyze the quarterly yields reported by municipal bond funds from September 1993 to September 2009. Despite substantial variation in the reported yields, we find that the yields provide no information concerning the future risk adjusted performance of the funds. We do find that the yield gap, defined as the difference between the distribution and SEC yield, does serve as a reliable predictor of the funds that will have the worst future risk adjusted performance. However, we find no evidence that investors use this information to avoid selecting poorer performing funds.

Keywords: bond mutual funds, distribution yield, SEC yield, yield gap

JEL Classification: G10, G11