How Yield Files Rates Income Funds
Every Fund File carries a six-dimension scorecard. This page documents exactly how each score is determined — the specific thresholds, the data inputs, and how the dimensions combine into an overall rating.
Determining where these thresholds sit required judgment, and we do not claim otherwise. Applying them does not. A 92% coverage ratio scores a 3 — for every fund, every time, without exception. Once the methodology is set, what follows is mechanical: the criteria on this page are the same criteria behind every Fund File scorecard, with no separate internal standard operating alongside the published one.
Publishing the methodology in full serves two purposes. It lets subscribers verify any rating against the underlying data themselves. And it is the basis for the Blueprint Series — those model portfolios include only funds scoring 4.0 or higher with no dimension below 2, and that claim carries weight only because the scoring rules behind it are public.
One caveat: a rating reflects our analysis as of the date it was published. It's an educational assessment, not a recommendation. We update the methodology from time to time, and every change gets logged at the bottom of this page.
Short definitions for the industry terms that come up below. This isn't exhaustive — just the terms that aren't self-explanatory on first read.
This dimension addresses the central question for an income investor: is the fund earning what it distributes? Three inputs are considered together — coverage ratio, UNII balance, and NAV trend — and combined into a single sustainability assessment.
| Score | Coverage Ratio | UNII | NAV Trend |
|---|---|---|---|
5 Excellent | ≥ 110% | Positive and growing | NAV growing over both 3-yr and 5-yr periods. Distribution clearly earned from investment returns. |
4 Strong | 100–110% | Neutral to positive | NAV stable or growing over 3-yr period. Distribution broadly supported. |
3 Monitor | 90–100% | Slightly negative | NAV flat to modest decline over 3 years. Distribution partially supplemented by gains or ROC. Watch trend. |
2 Concern | 80–90% | Negative | NAV declining over 3-yr period. Meaningful portion of distributions funded by capital erosion. |
1 Unsustainable | < 80% | Significantly negative | NAV in sustained decline. Distribution is largely return of capital. Cut risk elevated. |
Valuation assesses whether the current entry point is favorable, neutral, or unfavorable, measured against the fund's own trading history or its category peers. The inputs vary by fund structure. Closed-end funds trade at a discount or premium to NAV; ETFs and mutual funds cannot sustain that in the same way, since the creation/redemption mechanism keeps price and NAV closely aligned. Each fund type is measured against what is structurally relevant to it. This mirrors the approach used for Liquidity further down the page: one dimension, one five-point scale, with inputs adapted to what is actually measurable for that fund type.
| Score | Discount vs. Average | Z-Score | Context |
|---|---|---|---|
5 Deep Value | 3%+ wider than 5-yr avg | ≤ −2.0 | Historically extreme discount. Strong mean-reversion signal. Rare entry opportunity. |
4 Favorable | 1–3% wider than 5-yr avg | −1.0 to −2.0 | Meaningfully wider than average. Valuation tailwind for new buyers. |
3 Neutral | Within 1% of 5-yr avg | −0.5 to −1.0 | Fairly valued relative to history. No meaningful valuation advantage or penalty. |
2 Expensive | Narrower than 5-yr avg, or at premium within historical range | 0 to +1.0 | Trading richer than historical norm. Valuation headwind. |
1 Avoid | Significant premium, well above 5-yr avg | ≥ +1.0 | Paying above NAV or at a historically elevated premium. Not an entry point. |
ETFs and mutual funds do not sustain a persistent discount or premium the way closed-end funds can — arbitrage keeps ETF prices tied to NAV, and mutual funds settle at NAV once daily. Valuation for these fund types instead compares the fund to its category peers on cost, income, and return.
| Score | Expense Ratio | Yield vs. Category | Total Return vs. Category |
|---|---|---|---|
5 Excellent | Bottom quartile of category (cheapest) | At or modestly above category average | Top quartile, both 1-yr and 3-yr |
4 Favorable | Below category average | In line with category average | Above category average, both periods |
3 Neutral | At category average | Within a normal range of category average | Roughly in line with category average |
2 Unfavorable | Above category average | Notably above or below average, unexplained by strategy | Below category average, either period |
1 Poor | Top quartile of category (most expensive) | Extreme deviation, unexplained by strategy | Bottom quartile, both periods |
This dimension evaluates the people running the fund: manager track record, performance against the stated benchmark, and whether the mandate is clear and consistently executed or has drifted over time.
| Score | Manager | Benchmark Performance | Mandate |
|---|---|---|---|
5 Excellent | Top-tier, 10+ year track record, stable team | Consistent outperformance over 3 and 5 years | Clear, focused mandate. Transparent and consistently executed. |
4 Strong | Credible institutional manager, established team | Broadly matches benchmark over 3–5 years | Clear mandate, consistently executed. Some complexity acceptable. |
3 Adequate | Competent manager, reasonable history | Slight underperformance or inconsistent results | Mandate is broad or complex. Requires ongoing trust without clear edge. |
2 Concern | Inconsistent management, recent team changes | Persistent underperformance over 3–5 years | Mandate drift, strategy changes, or opaque construction. |
1 Poor | Manager/adviser changes, short history, credibility concerns | Significant persistent underperformance | Mandate unclear or inconsistent with stated objective. |
For investors holding funds in taxable accounts, the character of distributions matters nearly as much as the yield itself. This dimension ranks funds from the most tax-efficient income — tax-exempt municipal bonds — down to the least favorable: ordinary income delivered via K-1.
| Score | Income Character | Tax Form | Context |
|---|---|---|---|
5 Excellent | Primarily tax-exempt income (municipal bonds) | 1099 | Exempt from federal tax. Ideal for taxable accounts. Suitable for high-bracket investors. |
4 Strong | Primarily qualified dividends (≥ 70% qualified) | 1099 | Most income taxed at the preferential 15–20% rate. Taxable-account friendly. |
3 Mixed | Mix of qualified dividends and ordinary income, or ordinary income with meaningful ROC | 1099 | Taxable account use viable but reduces effective yield. IRA preferred. |
2 Ordinary Income | Primarily ordinary income (bond interest). No K-1. | 1099 | Taxed at marginal rate. IRA strongly preferred. |
1 Complex | K-1 issued (partnership) or C-corp deferred tax liability | K-1 or C-corp | Partnership K-1 adds filing complexity. C-corp deferred tax reduces NAV return. |
Liquidity measures how easily a position can be entered or exited without meaningful cost or delay. Here too, the inputs depend on the fund's structure. CEFs and ETFs trade continuously on an exchange, so liquidity is measured by trading volume. Mutual funds transact once daily at NAV directly with the fund company — there is no secondary market to measure — so liquidity is instead assessed through redemption terms: how quickly capital can be accessed, and under what conditions.
| Score | Avg Daily Volume | Daily Dollar Volume | Context |
|---|---|---|---|
5 Excellent | > 500K shares/day | > $10M/day | Institutional-grade liquidity. Tight spreads. Market orders generally fine. |
4 Adequate | 200K–500K shares/day | $2M–$10M/day | Adequate for most retail positions up to ~$100K. Use limit orders for larger trades. |
3 Moderate | 50K–200K shares/day | $500K–$2M/day | Adequate for positions up to ~$25K. Always use limit orders. |
2 Thin | 10K–50K shares/day | $100K–$500K/day | Meaningful spread and impact cost. Limit orders required. |
1 Illiquid | < 10K shares/day | < $100K/day | Thinly traded. Significant spread. Large positions impractical. |
| Score | Redemption Access | Fees / Restrictions | Context |
|---|---|---|---|
5 Excellent | Same-day NAV, no minimum holding period | None | Fully liquid daily redemption with no penalty regardless of holding period. |
4 Adequate | Same-day NAV, short minimum holding period (≤ 30 days) | Minor short-term fee if sold very early | Standard daily redemption. Brief early-redemption fee window is typical. |
3 Moderate | Same-day NAV, longer minimum holding period (31–180 days) | Redemption fee if sold within holding period | Daily liquidity available but a real cost applies to near-term selling. |
2 Restricted | Redemption gate provisions disclosed, or delayed settlement (T+3 or longer) | Meaningful fee, or gate has historically been invoked | Structural mechanisms can delay or limit redemption under stress. |
1 Illiquid | Interval fund or tender-offer structure — redemption only at scheduled windows | Redemptions capped as a % of assets; may be prorated | Not daily-liquid. Redemption available only at defined intervals, not guaranteed in full. |
Two funds can both yield 7% while carrying very different levels of risk — one through high-yield credit, leverage, and derivatives; another through investment-grade municipal bonds with none of that. This dimension is designed to capture that distinction. A higher score means better risk-adjusted income, not lower risk in an absolute sense.
| Score | Credit Quality | Leverage | Strategy |
|---|---|---|---|
5 Conservative | Investment grade (A or better avg.) | None or minimal (< 5%) | Simple, transparent mandate. Low volatility. |
4 Moderate | BBB to A range avg., some HY exposure acceptable | Low to moderate (5–20%) | Manageable complexity. Strategy is understandable. |
3 Moderate-High | BB avg., meaningful HY or EM exposure | Moderate (20–30%) | Requires more expertise to evaluate. Not for conservative investors. |
2 Elevated | B avg. or significant EM/structured credit | High (30–40%) or complex derivatives overlay | Significant credit risk, leverage, or complexity. Growth income profiles only. |
1 Speculative | CCC avg. or concentrated single-sector risk | Very high (> 40%) or highly complex | High probability of NAV volatility and distribution cuts in adverse conditions. |
Why equal weighting? Differential weighting requires an assumption about what matters most to income investors, and that assumption varies by investor type. A retiree focused on predictable income weights Distribution Sustainability most heavily; a value-oriented investor weights Valuation most heavily. Equal weighting produces a figure that is useful across investor types without imposing a single preference — subscribers can apply their own emphasis when evaluating individual dimensions.
ETFs and mutual funds: Valuation (D2) is not a separate dimension for these fund types — it is the same dimension with different inputs. Closed-end funds are scored on discount/premium, z-score, and 52-week range. ETFs and mutual funds, which cannot hold a persistent discount or premium, are scored against category peers on expense ratio, yield, and total return. The five-point scale and overall formula are identical either way.
The Blueprint Series model portfolios are constructed entirely from funds that clear these published thresholds. No fund is included on the basis of editorial discretion — inclusion is determined solely by whether the fund's scorecard meets the criteria below.
The Discount Opportunity dimension is renamed Valuation and is now documented as a single dimension applied across all fund types, using CEF-specific inputs for closed-end funds and peer-relative inputs for ETFs and mutual funds — the same approach already used for the Liquidity dimension, which applies share-volume inputs for CEF/ETF and redemption-term inputs for mutual funds.
Correction: the version 1.0 entry below stated that NAV erosion was added as a third input to the Distribution Sustainability dimension. This was inaccurate. NAV Erosion Attribution was evaluated during platform development and found infeasible to compute reliably — ATM share issuance contaminates the calculation in a way that cannot be reliably separated from distribution-funded decline using available data. It was not implemented and is not part of any published rating. The Distribution Sustainability dimension uses the three inputs documented above: coverage ratio, UNII balance, and NAV trend.