If you've been considering investing in money market fund accounts, you've probably seen a metric called the "seven-day yield." Although it's one of many metrics you should consider before investing, it's an important one to understand, since it can help you compare money market fund accounts to one another.
What is a seven-day yield?
A seven-day yield is a standardized calculation set by the Securities and Exchange Commission (SEC) that allows money market fund investors to compare potential investments. It's meant to project a mutual fund's potential income over the next year, minus fees, based on the last week's performance.
Like any other investment metric that uses backward-facing data to forecast future performance, the seven-day yield is only as good as the data that's being used. If last week was a particularly good or bad week for the money market fund account, you might see that the seven-day yield is out of step with its historical measurements, so it's important to review more than a single seven-day yield before investing.
Seven-day yield vs. 30-day yield
The seven-day and 30-day yields sound like they should be a lot alike, and they are, in a way. Both seven-day yield and 30-day yield calculations are regulated and required by the SEC, but a 30-day yield calculation is performed on a bond fund; a seven-day yield calculation is for money market fund accounts.
It might sound like a 30-day yield calculation would be more stable, but because money market funds are very reliable investments, it's generally assumed that a week is a reasonable time frame to predict future performance. The 30-day yield calculation is also done on fairly stable investments, but because bonds are traded frequently in bond funds, it gives a better picture of payouts, which may vary throughout the month.
How to calculate seven-day yield
The seven-day yield is simple to calculate and does exactly what you might expect. You'll need the price at the end of the designated seven-day window, plus any distributions, the price at the start of the window, and the fees during that week.
Here's the formula:
E = End price plus distributions
S = Start price
F = Fees
Seven-day yield = ((E - S - F) / S) x 365/7
So, if your money market fund account went from $930 to $1,000 this week and you paid 0.4% in fees ($4.00), your formula would look like this:
(($1,000 - $930 - $4) / $930) x 365/7 = 3.70%, which is your seven-day yield.
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Why seven-day yields matter to investors
Money market funds invest in short-term bonds, so it's important to understand what you're getting into. The seven-day yield is probably the closest way to compare them to money market accounts, using the annual percentage yield (APY). When you're trying to decide between these two investments, the seven-day yield and the APY are very roughly equivalent in weight.
But, even if you're not trying to choose between fund types, you can still use the seven-day yield to help you decide between investments while considering the fees, too. There's a reason the SEC has required these calculations to be disclosed to investors. The investment can be difficult to see from the outside, so this helps you to make a better decision.
Even though money market funds can be very stable options, it's still important to look at the history of their seven-day yield. An unusual week could change the way the investment appears on paper, but a long history of consistent seven-day yield calculations will give you a better idea of what to expect from your investment.
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