What is a 7-day yield?

A 7-day yield is the standard performance measure investors use for money market funds.

What does 7-day yield mean?

The name itself can be slightly misleading—a 7-day yield doesn’t represent what you could make in a week. Instead, it adjusts the fund’s average earnings over the previous 7 days to what it would look like as a percentage for a full year (if the rate stayed the same). The reason money market funds use 7-day yields is because the rates don’t usually stay the same for very long.

It’s a backward-looking view of a money market fund’s recent income, “annualized” to be able to compare it to other investments that also use a full-year calculation.

Why are 7-day yields used for money market funds?

Because the earnings rates of the individual investments that make up money market funds (a type of mutual fund) may change frequently – along with the investments themselves – a fund’s overall earnings can change frequently as well. A 7-day yield gives you a view of average earnings over recent days, and a way to compare different funds.

So, if the 7-day yield is 4.5% when you put your money into a fund, that doesn’t mean you’ll earn 4.5% after a year since the rate is likely to go up or down. What you earn in the future depends on the fund’s future investments and their earning rates over the time you hold your shares.

7-day yield vs. APY

APY (annual percentage yield) is a similar term frequently used for the interest bank accounts might make over 1 year. It estimates the percentage an account would earn in a year with compounding interest.

On the other hand, 7-day yield does not take compounding (reinvesting your earnings) into account. To see that calculation for a money market fund, look for the “compound effective” yield.

Read more: How to make your money work for you with compound growth

How is a 7-day yield calculated?

To ensure consistency, the SEC carefully defines how a 7-day yield is calculated.

The formula involves taking the value of a share including earnings at the end of a 7-day period (X), subtracting the value of the share at the beginning of the period (Y) as well as shareholder fees and fund operating expenses (Z), dividing the resulting amount by the value of the share at the beginning (Y again), and then multiplying that number by 52.14 (which is 365 ÷ 7, the exact number of weeks per year).

It looks like this: ([X – Y – Z] ÷ Y) × 52.14

Key takeaway

A 7-day yield represents potential yearly earnings based on the average rate of the past 7 days.