What Is the Seven-Day Yield?
The seven-day yield is a standard measure of the annualized yield for a money market mutual fund. It is calculated based on the fund’s average seven-day distribution, and allows for the direct comparison across many money market funds.
The seven-day yield is an important metric for investors who are seeking low-risk investment opportunities. It is also referred to as the seven-day annualized return. Read on to learn how the seven-day yield is used in investment decisions.
Key Takeaways
- The seven-day yield is a way to estimate the annualized return of a money market fund.
- This yield is calculated using the price difference over seven days, adjusted with an annualization factor.
- Many investors use the seven-day yield to compare money market funds and gauge potential returns.
- The formula for the seven-day yield considers distributions, fee deductions, and price changes over a week.
How the Seven-Day Yield Works
The seven-day yield is most often calculated for money market funds. This yield includes distributions paid by the fund plus any appreciation over a seven-day period, minus average fees incurred during seven days.
The seven-day yield helps investors compare across money market funds. The seven-day yield can help to provide an expectation for the future return on investment. Similar to forward yield, its calculation is a projection that typically includes the average distribution from the fund’s most recent payout.
Many investors may choose money market funds to hold excess cash in various types of accounts. Retirement accounts and brokerage accounts often allow for the election of a cash deposit sweep into money market funds. The seven-day yield is one of the most common metrics provided for money market fund comparisons by brokerage platforms.
Here’s a simple formula for calculating it:
((A-B-C)/B) x 365/7.
Where:
- A = The price at the end of a seven-day period plus average weekly distributions.
- B = The price at the beginning of a seven-day period.
- C = Average fees for the week.
- 365/7 = 52.14 which represents the number of weeks in a year.
The seven-day yield estimates the annual return based on one week’s average payouts. The methodology for the seven-day yield can vary.
Comparing Seven-Day Yields Across Funds
Barron’s lists top money market funds by seven-day yield, both with and without compounding. The list shows the industry’s highest yielding money market funds by popular industry categories. Money market categories like government, prime, and tax-free municipals are available. Tax-free municipals will be exempt from federal tax and also exempt from state tax if the investment corresponds with the investor’s state of residence.
Example of a Seven-Day Yield Calculation
Let’s look at an actual example of the seven-day yield. The Vanguard Federal Money Market Fund (VMFXX) reports the top seven-day yield in the government category as of January 3, 2018. It has a simple seven-day yield of 1.22% and a compound seven-day yield of 1.23%. Its most recent distribution of $0.00097 was paid out on January 2, 2018, giving it an average seven-day distribution of $0.0002425.
The seven-day yield calculation is as follows:
($1+$0.0002425-1-Expenses)/$1 x 365/7 = 1.22%
Be cautious with seven-day yield calculations, as they can vary if averages aren’t used.. The 30-day yield can also be good for comparison since its calculation is a hypothetical annualized return based on payouts from the past 30 days.
