Personal Finance & Money Asked on January 24, 2021
I’m currently invested in an open-ended fund. As I understand it, neither I nor my broker see its dividend. We just wake up on the payment day and see that the unit price of the fund has moved more than we’d expect from the movements of the market, and that’s that. Our unit number doesn’t increase and we don’t get any special notices. On dividend day, we don’t get told anything more than what we do on any other market day. The unit price gets reported, and that’s it. I believe this to be one such fund, as presented by a fairly typical broker.
Assuming that what I’ve said is accurate, why does the ex-dividend date matter to anyone? It seems that the only change that happens on the dividend date is that the unit price moves, so as far as I can tell, there shouldn’t be any difference between someone who buys at price x a week before the ex-dividend date and someone else who also buys at price x a week after. Because they both hold units on the dividend date, it appears obvious to me that they will both benefit from the increase in unit price on that day, independent of when they bought.
Answers so far have pointed out that this is in fact an OEIC (not an ETF as the question originally had it) and that the dividends are constantly reinvested, making the dividend and ex-dividend date meaningless. However, I have three objections to this:
It's bad form to answer my own question, but the comments have reveals that the question was flawed. First of all, OJFord is right to point out that this is an OEIC and not an ETF. Furthermore, the question assumed that the dividend date was when the dividends accumulated from the fund's underlying stocks were reinvested. However, if you compare any accumulation class fund's percentage change in price (and not total return!) with its income class equivalent, you will see that this is usually false. For example, with the accumulation class in red and the income class in blue, this graph is what we get from the question's linked fund, showing that the divergence was only triggered by the ex-dividend date (mid May, with the dividend in mid July). This also implies that the dividends from the accumulation class were reinvested on the ex-dividend date, destroying the premise of the question.
So why does this confusion exist? This takes some background work. Ignoring the ex-dividend date for a moment, here is my understanding of how the dividend payments work for accumulation units in an OEIC:
With this key fact - that the dividend is never seen leaving the fund - established, we can now ask the question that we were trying to answer: If the only thing that changes due to the fund's dividend is the unit price of the fund, why does the ex-dividend date matter? After all, I'll benefit from the change in unit price regardless of if I buy before of after the ex-dividend date.
Our answer to this is equalisation. That link explains it better than I can, but here is how it applies to this question:
Technically speaking, this has already answered the question. The ex-dividend date matters because it has a clear effect on the price of the fund. However, there is a final loose end that we should clear up.
As this question points out, everyone benefits equally from the change in unit price when the dividends are reinvested. However, the funds recognise your overpayment and equalisation is the fancy name for how they compensate for this. On or very near the date of reinvestment, the amount that you are recorded as having paid for your investment will be revised down in proportion to how much you overpaid (i.e. your proximity to the upcoming ex-dividend date). In my experience, your unit number and price will not change when this happens and your account won't be credited either. It's always been a case of the fund saying "we recognise that you overpaid by x amount, so we've reinvested it back in to the fund. As you're invested with us, everybody wins". And that's the end of the story!
In summary:
Correct answer by J. Mini on January 24, 2021
Where did you get this impression?
Of course you get a dividend.
Typically four times a year, but some of them only annually, or twice a year, or monthly. For example VTI (https://investor.vanguard.com/etf/profile/distributions/vti):
Type Distrib Record Ex-Div Payable
Div $0.69990 06/26/20 06/25/20 06/30/20
Div $0.61360 03/27/20 03/26/20 03/31/20
Div $0.88550 12/26/19 12/24/19 12/30/19
Div $0.70000 09/17/19 09/16/19 09/19/19
Div $0.54720 06/18/19 06/17/19 06/20/19
Div $0.77200 03/26/19 03/25/19 03/28/19
Answered by Aganju on January 24, 2021
I have no clue how dividends are handled in the UK. Here's how they are handled in the US. See my answer here.
If dividends are reinvested, they are of no consequence other than taxation if received in a non sheltered account and possibly a minor discrepancy in reinvested shares acquired because the Payable date is after the Ex=Dividend date (share price will likely be marginally higher or lower).
Answered by Bob Baerker on January 24, 2021
The fund you linked is described as "accumulation units" and has a counterpart described as "income units". Most ETFs (in the US in particular) behave like income units. Accumulation units, which directly reinvest dividends as they are received from stock holdings and do not pay them out in cash, may be common in the UK but are likely obscure elsewhere.
I think you are correct that the ex-dividend date is not meaningful in this case. It may be listed for that fund by default based on the corresponding income units. See discussion here and here.
It seems that the only change that happens on the dividend date is that the unit price moves
It would not move in any outsized way; rather, the price moves every day by the moves in market prices of holdings, plus any dividends paid by those holdings, which would be a very small amount because only a small percentage of stocks pay dividends on any given day. Moreover, those dividends are offset on average by drops in the corresponding stock prices. In effect, the accumulation ETF price tracks a total return index.
It would not be feasible for the dividends to somehow accumulate "outside" until a fixed date (ex-dividend) and only then appear as an extra jump in the ETF price, because everyone would buy the ETF just before and sell it after. No risk-free "dividend capture" arbitrage is possible whether with accumulation units or income units.
Answered by nanoman on January 24, 2021
First of all, that's not an ETF (Exchange-Traded Fund) - it's an OEIC (Open-Ended Investment Company). (It's price reflects the underlying holdings, 'open-ended' means it can create and sell you 1000 units without moving the price, assuming the underlying prices don't move.)
You receive dividends from it, the OEIC, not (directly) the underlying - or you would have thousands of ex-div dates, not one.
However, you've linked to the 'Class C - Accumulation' variant, which means that income from the underlying will be reinvested, not distributed as income ('Other unit types available: Class C - Income') - it stays within the fund.
Ex-dividend date thus matters to 'Income' units in the same way as for any company, fund or not. 'Accumulation' units just remove the choice of what you do with your dividend: you buy more shares. Though since the only shares are 'inside' the fund, you're not issued more units, but the units you have represent a claim on more shares of the underlying.
Regarding your updated questions:
Answered by OJFord on January 24, 2021
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