Let’s go back to basics (it’s not quite back-to-school time) to discuss a topic that can occasionally cause communication issues for investors of all types. While the yield to maturity on an individual bond is typically the best predictor of total return, as we’ve noted in many of our Market Outlooks, the current yield on almost anything else is not. This distinction is generally well understood. Most investors expect the S&P 500 to return higher than the measly ~1.3% dividend yield on the index today. However, as more income-focused products enter the market it is important to be aware of the differences between yield and total return and be able to point out products that are trading long-term growth (which can drive a large part of total return) for short-term distributions.
To illustrate, four major asset categories are shown below. I took the annual total return for each ETF in each category and subtracted out the average yield over the 12 months in each of the past 3 years. A positive number indicates that the total return (price return + yield) was higher than that of yield alone; a negative number indicates that yield throughout the year was higher than the total return actually achieved. In the two fixed income categories on the left-hand side, you see that the two numbers aligned closely in 2023 and 2024. Most years this would likely be the expectation — some years have declining interest rates leading to price appreciation, other years do not. In contrast, 2022 saw the largest rout on record for broad fixed income. The starting or ending yield did not matter much as prices declined rapidly in response to rising interest rates.
Sources: Carson Investment Research, Morningstar Direct 6.25.2025
Past Performance is not an indicator of future results
The categories on the right show greater volatility, which you would expect as most of their total return is driven by factors other than income. Nontraditional equity includes popular options-based equity income strategies. Depending on how these are structured, a lot of these products can fall into the trap of equating expected return with current yield. That is a dangerous game, when in fact, fewer than 5% of derivative income ETFs have had annual total returns within +/-2% of their yields!
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Taking this to an extreme example, consider the characteristics of one ETF (shown below). In 2024, this ETF had a 12-month trailing yield that over the course of the year averaged 93%. Yes, you read that right. With a yield like that, returns “had to be great!” Well, they were actually 110% lower, with the total return at -16.7%. What is happening here? A lot of your money is effectively being handed back to you (after expenses). This is an extreme example, but an ever-growing concept as options become more and more prevalent in the ETF wrapper.
Source: Morningstar Direct 6.25.2025
Unless you are being quoted a true “yield to maturity,” be cautious equating yields and returns. We recently launched an income version of our Carson House View models, built off of strategies we have managed for decades. Yields across models from the most conservative to the most aggressive are designed to be consistent (and currently around 5%). Despite a consistent yield, we fully expect the more conservative models to be just that – less risky, and vice versa on the more aggressive side, and long-term returns determined by that level of risk rather than yield. Many investors have cash flow needs and they prefer to see the income being produced from a variety of sources, and we hope to address that with these portfolios. However, especially for taxable investors, total return should always be a primary consideration when it comes to investing and withdrawing money from those investments.
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For more content by Grant Engelbart, VP, Investment Strategist click here
