All traditional S&P500 index funds distribute dividends each year (quarterly). This distribution adds a tax drag on long term index investing. It also adds a little unpredictability to one’s total income each year. And this is why some people prefer to invest in things that never distribute any dividends like Berkshire Hathaway.
Well, it looks like beginning tomorrow a group named Roundhill Investments is creating an S&P500 exchange traded index fund that avoids those dividends and thus doesn’t distribute them to holders of the ETF. I think they sell the shares before ex-div day and then buy them back immediately after ex-div day. They are charging a 21.5 bps expense ratio which is kind of high for an S&P500 index fund. But for the first year, they are waiving part of that 21.5 bps fee. Since the S&P500 yield is about 1.25%, paying 0.215% in expenses for this fund without dividend payouts is nearly as much as paying the taxes on an S&P500 index fund with the payouts. So I’m not particularly impressed by this new fund. It begins trading tomorrow, so we will see how it does, and how much money it attracts.
So…instead of receiving divis that are taxed at a preferential rate, they are taking short term cap gains, that are taxed at a higher rate? We who work out our taxes with paper forms and a calculator, know that, within limits, the personal income tax on cash divis is zero.
IIRC, stock prices go up just before a dividend because of buyers who want to collect said dividend, and then drop afterwards. If so, over time the fund would be selling high and buying low. I doubt it would be significant or it would have been arbitraged away.
Yes, absolutely. If you are in the zero long-term capital gains/dividend bracket, this fund isn’t for you. If you are in the 15%, and not avoiding income to qualify for certain credits, then this fund isn’t for you. And if you are in a high-ish tax bracket, then you may as well buy a regular S&P500 fund and pay the taxes on the dividend. But if you are in a high-ish bracket AND you need to avoid income to avoid things like IRMAA, then perhaps this fund is for you.
I don’t know the details, but apparently ETFs have different rules than individuals have. They don’t actually “sell” for money, instead they “exchange” for ETF shares, and then exchange those ETF shares back after they’ve gone ex-dividend.
Interesting but a bit complicated. I try to focus on total return which includes having more dividend stocks in my tax sheltered accounts, and more low dividend, high growth equities (like vgt and brk) in my non sheltered accounts. But I don’t know how much difference that makes.