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As Dividend ETFs Pay Out, Expect Price Action

David Fabian

Dividend season is in full effect for the majority of equity ETFs that pay quarterly distributions. The last week of every quarter generally brings a declaration of income from the underlying basket of companies that have generated dividends over the last 90 days.

The process can lead to confusing price action for funds with high dividend yields that appear to be decoupling from their benchmark for a single day.

This event is known as the dividend “ex-date”, which is the day that the amount of the dividend is subtracted from the net asset value of the ETF. The income will then be paid in cash shortly thereafter to shareholders of record prior to that date. 

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Not surprisingly, the ETFs that will feel the biggest change in price as a result of this income are the funds with the largest quarterly distributions, which generally includes high yield asset classes such as mortgage REITs, master limited partnerships, and business development companies. 

For example, the iShares FTSE NAREIT Mortg.REITIn Fd ETF (NYSE: REM) has a 30-day SEC yield of 9.35 percent and announced a significant quarterly distribution of $0.31 per share. With the price of REM hovering near $12, this amounted to a single day impact of 2.5 percent.

Mortgage REITs are notorious for generating high yields by borrowing short-term term debt at low rates and using the money to purchase long-term mortgage bonds.  The spread between the two is generally used to determine how profitable the REIT is and how much income it will distribute to shareholders. 

In addition, many international dividend indexes can pay substantial income during this quarterly cycle as well.

The iShares Asia/Pacific Dividend ETF (NYSE: DVYA) recently declared a distribution of $1.02 per share, which translated to single-day adjustment of over two percent as well.  This ETF tracks exposure to high quality dividend paying companies in Australia, Japan, Hong Kong, and New Zealand. 

It’s also worth noting that many international ETFs are known to distribute lumpy income streams as part of their differing fiscal years and special distributions.  This can impact yield statistics over varying time frames and is in sharp contrast to the relatively smooth dividend payments of domestic ETFs.

ETF investors should always keep in mind that dividends need to be calculated back into performance to track the total return of each fund.  This will allow you to view a complete picture of the price and income components over time.

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