How does an etf work
ETFs and Dividends
For the most part, dividends are straightforward when it comes to ETFs. The most basic example is the SPDR S&P 500 ETF ( SPY A ), which is not only the most popular ETF in existence but also a dividend payer. According to its prospectus, the fund puts all dividends into a non-interest bearing account until the time comes to make a payout.
The ex-dividend date for SPY is the third Friday of the final month of a fiscal quarter (March, June, September, December). If that day should happen to not be a business day, then the ex-dividend date will fall on the day prior. The record date comes two days prior to the ex-dividend date. At the end of the quarter, SPY pulls the dividends from the non-interest bearing account and distributes them to its investors.
The list below displays the dates SPY’s top five dividend-paying holdings distributed their respective dividends throughout 2013, and the date SPY itself made its distribution.
- 11/14/2013: AAPL – Apple made a quarterly distribution of $3.05.
- 12/10/2013: XOM – Exxon made a quarterly distribution of $0.63.
- 12/10/2013: JNJ – Johnson & Johnson made a quarterly distribution of $0.66.
- 12/12/2013: MSFT
– Microsoft made a quarterly distribution of $0.28.
- 1/27/2014: GE – General Electric made a quarterly distribution of $0.22.
- 1/31/2014: SPY – The S&P 500 ETF made a quarterly distribution of $0.98025.
Holding the dividends in cash is one of the two most popular strategies in the ETF dividend world; the second is reinvesting the dividends back into the fund. A prime example of this comes from the Core S&P 500 ETF ( IVV A- ). This popular product reinvests the dividends it receives back into the fund, creating something of a leverage for the product (probably at 1.001X) since it is investing with “borrowed” money.
When it comes time to make a payout, the fund pays out the dividends it accumulated. If IVV’s price has jumped during this period, then the extra principal left over that was made from reinvesting the dividends is left in the fund. Because of this, IVV will tend to slightly outperform SPY in bull stretches, despite employing the same strategy. Note that this process works in reverse, as a bear market will watch IVV perform slightly worse than its larger counterpart. The following table displays the fund’s annual returns for the last five years:Source: etfdb.com