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SEC yields "are like the square root of negative-1 in algebra"

I really liked that quote from Frank Fabozzi in this Intelligent Investor column by the always-worth-reading Jason Zweig:

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How Inflation-Protected Funds Get to Inflate Their Yields By JASON ZWEIG

-snip- Among the 173 TIPS mutual funds tracked by Morningstar, the reported "SEC yields" as of March 31 ranged from minus-0.77% to 5.58%, with 12 funds yielding at least 5%. Four of the seven exchange-traded funds that specialize in TIPS displayed yields greater than 5%, with Pimco 15+ Year U.S. TIPS Index leading the pack at 6.07%.

Yet no TIPS yield more than 1.75%. How could anyone but an alchemist generate 5% or more out of 1.75% or less?

-snip-

Worth reading.

Reply to
BreadWithSpam
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I was not aware that funds differed in the way they treated the inflation adjustment in calculating TIPS SEC yield. Definitely worth the read. Thanks.

And I agree that the quote is cute. I do, however, disagree with the rest of the quote: "They give you an imaginary number".

I would rather say that SEC yields enhance the richness of financial numbers in much the same way that adding i closes the field of real numbers.

(See Algebraically Closed Fields:

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TIPS inflation value adjustments are anything but imaginary - just ask the IRS if you hold TIPS in a taxable account. (Phantom, yes; imaginary, no - perhaps a distinction without a difference :-) But if you own a TIPS fund, you receive real (not imaginary, not phantom) cash dividends for that inflation adjustment.

From Vanguard's Inflation-Protected Securities Fund Prospectus: "A mutual fund holding [Inflation-Indexed Securities] pays out ... the income attributable to principal adjustments each quarter in the form of cash or reinvested shares, and the shareholders must pay taxes on the distributions."

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Reply to
Mark Freeland

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