Trading ETFs Near Dividend Dates WWW.CANADIANCOUCHPOTATO.COM In my most recent podcast, I
How settlement dates affect dividends
addressed an excellent question from
Now let’s consider how settlement
Philip, who asked, “Are there days
dates affect the payment of
when ETF investors should avoid
dividends. When an ETF announces
trading?”
a dividend (or, in the case of a bond ETF, an interest payment), it will
Philip’s question has nothing to do
declare a record date and a payment
with trying to time the market. He
date. To use a real-world example,
simply wants to know whether there
the most recent dividend paid by the
might be days when you should not
Vanguard FTSE Canada All Cap
buy or sell ETFs close to the dates
Index ETF (VCN) was $0.24 per
when distributions (dividends or
share, with a record date of March 2
interest payments) are made. And
and a payment date of March 9.
the answer to that question is—maybe.
This means any investor who owned VCN on March 2 would receive the
Let’s begin with a reminder that when
dividend one week later, and this
you buy or sell shares of an ETF, the
would be true even if he or she sold
trade settles two business days later
the holding during the intervening
(weekends and holidays are exclud-
days. If you owned the ETF on
ed). In the industry, this is known as
Monday, March 2, but sold it on
T+2 settlement. For example, say you
Wednesday the 4th, the trade would
buy 500 shares of an ETF at $20
settle on Friday the 6th, and you
each on Monday. Assuming no
would still receive the dividend on the
holidays, the trade settles on
following Monday.
Wednesday, so you do not necessarily need to have the $10,000 in your
You might be wondering whether
account until that day. (In practice,
there is an opportunity to profit here
some brokerages do not allow you to
by purchasing shares on the day
place a trade if you have insufficient
before the ex-dividend date and then
cash in the account on the trade
selling them the next day? That
date.)
would entitle you to the dividend and—assuming you could sell your
If you sold those 500 shares for $20
shares for roughly the same amount
each on Monday, the cash balance in
you paid—you would be collecting
your account might read $10,000
that income with very little risk.
immediately, but your brokerage almost certainly will not allow you to
Well, as you can imagine, if it were
withdraw that cash until after the
that easy, every hedge fund would
trade settles on Wednesday.
have an algorithm programmed to
W W W. M B E F O RYOU. C O M
harvest free dividends in this way. The reason this doesn’t work is that on the ex-dividend date, the share price of the ETF will fall by an amount roughly equal to that of the expected dividend. This makes logical sense, because a share of an ETF is more valuable if it comes with the promise of the dividend, and less valuable if the dividend is not included. The market is efficient enough to recognize this, so you can’t make a risk-free profit. All of this means that if you’re buying or selling ETFs close to the dividend record date in an RRSP or TFSA, there is no specifically good or bad time to place your trade. Either you’ll pay less for the shares and forfeit the dividend, or you’ll pay more and receive the distribution. There is no theoretical advantage or disadvantage either way.
MBE BUSINESS MAGAZINE FEBRUARY / MARCH 2020
69
