What is the difference between APY and 7-day yield?

[ioannes]

Sorry for this elementary question but I am trying to understand where to keep my emergency cash parked. My Empower Personal cash account is offering a 4.7% APY, while Vanguard money market (VMFXX) offers 5.25% 7-day SEC yield. From reading online, it appears that APY and 7-day SEC yield are essentially the same. Is this right?

 

[shantom]

@ioannes APY is the annual percent yield - if you left the money alone and reinvested the growth, APY is the total % growth you'd get over 1 year.

7-day SEC yield is the average APY that the fund has been getting over the past 7 days. Money market funds like VMFXX continually buy newly issued bonds at the best available market rate, and charge their expense ratio. Bond and MMF rates change as the federal reserve changes the federal funds rate.

Money market funds will generally have higher yields than HYSAs, but if the Federal Reserve cuts interest rates they may also drop faster than HYSAs. Also, money may not be as readily liquid as it is in a HYSA.

 

[franklinjm777]

@shantom And what is your opinion on that?

 

[emma82]

@shantom hypothetically, if you had a 100 dollars and the 7 day yield remained the same, what would be the difference in return if the APY and 7 day yield are both 5%?

 

[shantom]

@emma82 There would be no difference. However, the 7-day yield does not typically remain constant, especially as the Fed is changing interest rates.

 

[blueberry25]

@ioannes The 7 day yield is what the interest rate was over the last 7 days and if that average rate held for the entire year then that is what you would be the APY. The APY is what you actually get in a year. So if the APY is 4% thats basically what the return is expected to be in a year probably based on the last 12 months while the 7-day sec yield is what the return would be in a year if the interest rate over the last 7 days lasted 365 days. If the 7 day yield is higher than the APY it means rates are increasing. But it is no guarentee they wont decrease again.