When you look up a TIPS mutual fund or ETF, you may see several different yield numbers. What do those mean and which one should you pay attention to?

When you buy a TIPS mutual fund or ETF, you may ask "what's the yield?" You look up the information on Morningstar or on the provider's website, you see many numbers and they are all different. What's going on?

Let's use as an example the most popular TIPS mutual fund, Vanguard Inflation-Protected Securities Fund (VIPSX) . On the day I wrote this article, June 29, 2009, I saw this from Morningstar:

At the same time, I saw this from Vanguard:

iShares reported four different yield numbers for its iShares Barclays TIPS Bond Fund ETF:

The Morningstar data for the Vanguard TIPS fund were as of 5/31/2009. The number from Vanguard was as of 6/26/2009. Besides different as-of dates, the 3.79% yield number from Morningstar was more than double the 1.49% number from Vanguard. That's a big difference. Who was right? When I clicked on the small "info" icon, Morningstar explained:

"Yield, expressed as a percentage, represents a fund's income return on capital investment for the past 12 months. Morningstar computes yield by dividing the sum of the fund's income distributions (interest distributions from fixed-income securities, dividends from stocks, and realized gains from currency transactions) for the past 12 months by the previous month's NAV (adjusted upward for any capital gains distributed over the same time period)."

Vanguard explained its number with these two pop-up notes:

E -- BASED ON HOLDINGS' YIELD TO MATURITY FOR 30 DAYS AS OF END OF PREVIOUS WEEK.

G -- DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE

Got it? Morningstar reported distribution yield over the trailing 12 months. Vanguard reported yield to maturity over the trailing 30 days. Vanguard's number is also a "real" yield, without inflation adjustment, while Morningstar's number includes inflation adjustment.

The distribution yield from Morningstar looks backwards. It calculates from what the fund paid out in the previous 12 months. Due to market changes, what the fund will pay in the next 12 months will not be the same as what it did in the last 12 months. The payout is not a good metric for a TIPS fund anyway, because it includes inflation adjustments. Based on the number alone, you cannot know how the fund paid or will pay relative to inflation.

The yield to maturity number from Vanguard is more meaningful. It looks forward to all the expected interest and principal repayments from the bonds in the fund and calculates a necessary rate of return that would generate the same cash flows at the current prices. Because it's forward-looking and it's net of inflation adjustment, an investor can use this number as a measure for how much inflation protection the fund is providing.

There is one problem with the yield to maturity number from Vanguard. It's an average of the past 30 days as of the end of the previous week. If the yields have been stable, it's not much of a problem. If the yields have risen [or fallen] sharply recently, the average will be lower [or higher] that what the yield is today. When you buy a fund, you are getting today's yield, not its yield over the last 30 days. The 30-day average number can make the fund look worse [or better] than the yield to maturity of an individual bond of similar maturity, while in reality they are comparable.

iShares provided more granularity in the yield data for its ETF. It reports the distribution yield (4.34%), the 30-day SEC yield (1.52%), and the real yield (1.75%). I believe this last number is the real yield to maturity on the as-of date, and it's the most meaningful yield number for someone who is considering buying a fund or ETF.