I've been looking at vab and it has an ytd return of 5.75% and a Y TM of 1.4%. There seems to be a lot of focus on the YTM and i don't understand why you would focus on that rather than the return? I'm considering whether to add money to my gic ladder or add to vab.
Here's the way I think about it. Bond fund returns consist of two parts, which are added together:
The first part is the rate of return from the interest-bearing things it holds. These reliably increase in value at the portfolio's average yield. For example if the stuff inside VAB yields 2% then the overall price goes up, smoothly, at 2% annualized. This part is exactly like the return of a GIC portfolio; smooth and steady, at the yield %.
The second part is bond market volatlity and changes in the bond market. These can be really volatile moves, big swings up or down. But they are unpredictable and pretty random; you can't anticipate or do anything about these.
When we predict or forecast the future return of VAB, we assume that the second part averages out to zero. Instead we go with the first part, which is the predictable portion.
Yes in reality both are added together but the first part (the yield to maturity) is the best estimate for future return. And this does work out in reality... if you look at the YTM on a bond fund, then the next 10 year return, they usually match up pretty well.
I don't understand how they can know what the yield would be in the future.
A factor here is the time horizon we're talking about. The Yield To Maturity is a good estimate of the fund's return for the # of years to maturity. For VAB that's about 10 years.
We don't know the future yields. It could be that in year 8, year 9, the yields are very different than today. But YTM today is a good estimate of the overall return (CAGR) over the first 10 years.
What happens beyond 10 years is a whole different matter and I agree, completely unknown.