What Is Seven-Day Yield?
Seven-day yield is a standard measure of the annualized yield for a money market mutual fund. It is usually 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 may also be referred to as the seven-day annualized return.
- Seven-day yield is a method for estimating the annualized yield of a money market fund.
- It is calculated by taking the net difference of the price today and seven days ago and multiplying it by an annualization factor.
- Since money market funds tend to be very low risk, the higher the seven-day yield the better.
Understanding the Seven Day Yield
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.
Seven-day yield helps investors compare across money market funds. 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.
The basic calculation is as follows:
((A-B-C)/B) x 365/7.
- 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 provides investors with an estimate of the yield they can expect over the next year, based on the average payouts of one week. The methodology for the seven-day yield can vary.
Seven Day Yield Comparisons
Barron’s list of the industry’s best money market funds by seven-day yield are reported with and without compounding. The list shows the industry’s highest yielding money market funds by popular industry categories. Money market categories for investing can include government, prime and tax-free municipals. 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.
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%
Investors should be cautious of seven-day yield calculations since a fund’s seven-day yield can sometimes vary with distributions if an average is not 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.