Estimated Long-Term Return

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Updated June 30, 2022

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What Is Estimated Long-Term Return?

Estimated long-term return is a hypothetical measure that forecasts an investor's expected return over the life of an investment and is typically quoted for fixed-income investments with a fixed duration.

Key Takeaways

Estimated long-term return is a hypothetical measure that forecasts an investor's expected return over the life of an investment and is typically quoted for fixed-income investments with a fixed duration.
Typically, the estimated long-term return is calculated as a yearly rate of return over a specified time frame and is often presented net of estimated fees.
Estimated long-term return can be comparable to a savings account rate or the rate of interest quoted for a certificate of deposit.

Understanding Estimated Long-Term Return

Estimated long-term return is a metric that provides investors with a return estimate they can target when investing in a fund over a long-term time frame. This measure can be comparable to a savings account rate or the rate of interest quoted for a certificate of deposit. Generally, fund managers reporting estimated long-term return will be able to arrive at this calculation because the underlying fund investments have a specified return that is given at the time of initial investment.

Many fixed-income funds may choose to disclose estimated long-term return in their registration documentation and marketing materials. Proposals have also been made to provide this information in the Form S-6, which is the registration statement filing for unit investment trusts (UIT), though no final rules have been dispersed.

Unit investment trusts, and specifically UIT portfolios with a high allocation to fixed-income investments, can provide an ideal vehicle for estimated long-term return disclosure. These investments are one of three formal investment companies regulated by legislation from the Investment Company Act of 1940. These investments are created through a trust structure and issued with a fixed maturity date. In the realm of fixed income these investments can be a good alternative to high-yield savings accounts and certificates of deposit.

Overall, estimated long-term return disclosure can be a marketing measure, easily quoted by fixed-income funds, that can increase marketability. Most funds will have a higher estimated long-term return than high-yield savings accounts or certificates of deposit which can draw investors seeking low-risk fixed-income investments.

Estimated Long-Term Return Calculation

Typically, the estimated long-term return is calculated as a yearly rate of return over a specified time frame. It is often presented net of estimated fees. In fixed-income portfolios it can easily be based on the yields of all the underlying securities in a portfolio. In this case, it is usually weighted to account for each security's market value and maturity.

The estimated long-term return can be a helpful point of consideration when planning on investing in a fixed-income product over the long term. It can give a fairly accurate estimation of the return on the portfolio. It is also similar to the yield to maturity measure of a single bond extended to a portfolio, with some adjustments.