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I’m rather new to ETFs. One thing I’m confused about is the reinvestment of dividends and distributions. In my regular mutual funds, I always have dividends and distributions reinvested. However, the ETFs I’ve bought this year pay their dividends and distributions in cash. Is there not a way to have them reinvested automatically? I didn’t notice an option for that when I bought them.
An advantage of mutual funds/OEFs is that reinvestments are easy and on the ex-div dates.
You can also turn on reinvestments for ETFs, but those are handled differently - depends on the ETF sponsor and the brokerage.
1. If the brokerage has a deal with the ETF sponsor, then, you may get a small discount on reinvestments, and reinvestments may be earlier.
2. More common is for the broker to handle this all by itself - it pools all reinvestment orders a few days AFTER the pay-date (that may be several days after the ex-div date) and executes a large market-order for its reinvesting clients.
Unfortunately, many charting services may incorporate reinvestments for BOTH mutual funds/OEFs and ETFs on the ex-div dates, so the ETF TRs shown may be a bit unrealistic.
I guess I’ll have to call Fidelity and talk to a rep. I usually handle everything online, but couldn’t figure out a way to set this up. One of the funds is TCAF, which I assume will just make annual distributions, so reinvesting manually should be no big deal. The other is USFR, which pays dividends monthly.
My experience with Vanguard, specifically VHT, has always allowed me to reinvest dividends. I do manage this directly on the Vanguard brokerage platform.
@Tarwheel , as per YBB note for Fidelity. Login, and you'll see this choice to the right side of a line of choices. Once selected, you'll see a list of all your investments and current settings for how dividends and cap. gains are currently set. Select 'update', where your choices may be made for changes. We have a joint taxable acct. and each with T and Roth IRA's. BE sure to log in to make changes to as many accts. as you need to adjust.....i.e.; login for yourself and your wife would have to login to make changes to that acct., if this is the case for you. We do have etf's in all accounts that have been set to reinvest dividends/cap. gains FOR reinvest in security, VS to the 'core cash account'. Let us know if you were successful. Remain curious, Catch
(On the Fidelity Account website ) the “Manage Dividends” tab (underlined) appears just below the account label / designation near the top of page (ie “Roth IRA”). Click on that link.
It will take about 2 days after adding a new holding for it to show up, however. You can reinvest dividends from mutual funds, CEFs, ETFs & Stocks. But I have one ADR on which the option isn’t available (confirmed by a Fido rep).
Some funds do not reinvest capital gains (I think both short and long-term) but reinvest dividends. If your brokerage is reinvesting on the open market, they may reinvest your dividends and capital gains. But hopefully, your ETF is managed well enough that capital gains are not a common occurrence. Also, M&As can result in capital gains. Vanguard changing index provider or a change in the underlying index of a passive ETF can result in capital gains (hopefully, not a common occurrence). If a Mutual fund and ETF are just a different class of the same fund, capital gains can accrue to the ETF holders.
BTW, I am relative new to Vanguard platform. I normally reinvest distributions for mutual funds, but take them in cash for stocks, ETFs, CEFs (At Fido, Schwab). It seems that Vanguard default is to reinvest - I didn't pay attention to this detail when my accounts transitioned from VG mutual funds to VG brokerage. But when I saw fractional shares for some ETFs, I knew right away what happened. Anyway, I am letting it be as-is for a while in the Vanguard accounts - maybe I will get used to it and like it.
"When reinvesting dividends, Vanguard Brokerage Services combines the cash distributions from the accounts of all clients who have requested reinvestment in the same security, and then uses that combined total to purchase additional shares of the security in the open market. Vanguard Brokerage will attempt to purchase the reinvestment shares on the payable date. The new shares are divided proportionately among the clients' accounts, in whole and fractional shares rounded to three decimal places. If the total purchase can't be completed in one trade, clients will receive shares purchased at the weighted average price paid by Vanguard Brokerage Services."
Some funds do not reinvest capital gains (I think both short and long-term) but reinvest dividends.
Example? Perhaps you're thinking of ETFs structured as UITs (e.g. SPY, QQQ). What UITs cannot reinvest are dividends from underlying equities and interest from underlying debt securities.
Unlike an ETF structured as a UIT, an open-end fund ETF ... has greater flexibility to reinvest dividends from portfolio securities
In any case, this limitation refers to internal operation of the funds, not to how they can or cannot reinvest distributions.
So far, I've found no ETFs that reinvest distributions themselves. It seems that it is always the broker reinvesting dividends as a third party service, so that the investor doesn't have to do it manually. It's different " in Canada where some ETF sponsors offer DRIPs.
Even there, the ETF is not issuing new shares but always buying them on the open market. So the ETF is just playing the role of the third party broker and not really acting as the issuer of shares. For example, with Vanguard Canada ETF DRIPs,
your distributions will automatically be reinvested into units purchased on the open market in the five business days following the distribution payment date. ... The price of your new units will be the average price of all units purchased under the plan excluding commissions, fees and transaction costs incurred by the plan agent.
If the brokerage has a deal with the ETF sponsor, then, you may get a small discount on reinvestments, and reinvestments may be earlier.:
This statement sounds like true stock DRIPs that may give small discounts on stocks acquired directly from a company. But that doesn't seem likely with ETFs, as they issue new shares only to authorized participants (APs) in large blocks (creation units). And I haven't been able (yet) to find an ETF DRIP (not involving the broker) in the US.
Getting back to UITs, I'm not sure I'd take the Vanguard page on dividend reinvestment too literally. It reads in part:
Unit investment trusts [footnote omitted], foreign equities, and certain domestic equities and certain American Depositary Receipts (ADRs) are not eligible for the reinvestment program.
That would seem to make SPY and QQQ ineligible for dividend reinvestment at VBS.
@bee, I see TD reinvested the VHT Dec 2023 distributions at $248.3661 per share. Do you mind sharing @ what re-investment price Vanguard did for you?
You make an interesting point, I also have to check not only ETF distribution price adjustments, but I own the same mutual fund on different platforms. Technically adjusted price (after distributions) for any ETF or mutual fund should be the same, right?
VHT ex-div 12/19/23 (EOD NAV $247.46), pay-date 12/22/23 (range $247.32-249.12, close $248.38).
2 points:
1. Reinvestment by Vanguard was on the pay-date near the close. It may be later by other firms.
2. Most chart services (StockCharts, Stock Rover, PV, M*, etc) likely assume reinvestment on ex-div date at ex-div price that is impossible in practice for ETFs. So, that is a source of small errors in the ETF charts. Keep this in mind for comparisons with VG index OEF classes or the OEF cousins by other firms.
It's way worse than that. Is the NAV or the market price used? Is it a single price or an average of prices? Is it in a single day, and which day, or an average over multiple days?
From the SPDR S&P 400 ETF (MDY) prospectus:
The total returns in the bar chart, as well as the total and after-tax returns presented in the table, have been calculated assuming that the reinvestment price for the last income distribution made in the last calendar year shown below (i.e., 12/16/22) was the net asset value per Unit (“NAV”) on the last Business Day of such year (i.e., 12/30/22), rather than the actual reinvestment price for such distribution which was the NAV on the last Business Day of January of the following calendar year (e.g., 1/31/23). Therefore, the actual performance calculation for the last calendar year may be different from that shown [in the prospectus].
This year, MDY went ex on Dec 15th, with a pay date of Jan 31, 2024. Reinvestment cannot come before dividend is paid. Talk about a cash drag! (MDY is a UIT).
From a M* ETF data definition page:
Morningstar's return figures may differ from those published by other rating firms or fund groups. This may be a result of time-period discrepancies, or because different firms employ different methods for calculating total return. For example, some services reinvest all dividends at month-end prices. Morningstar, however, uses the actual reinvestment price that a shareholder would have to pay.
But what is that actual reinvestment price? Here's a Bogleheads thread where a Fidelity customer rep is reported as having said:
Dividend reinvestments are priced at the average price that the security is purchased by Fidelity.
Fidelity identifies all customers that will be reinvesting their dividend, and then goes to the market to purchase shares three business days prior to the payable date. We purchase as many shares as possible on a best-efforts basis, determine the average share price, and reallocate these shares proportionately to the customers that are reinvesting their dividend. This process typically results in a different reinvestment price than the price that the security is currently trading.
As someone in that thread pointed out, the three days came from T+3 trading, which is now T+2. The cash needs to be available on the reinvestment settlement date.
Closed end funds are different. They may have legitimate DRIPs, where the funds themselves issue new shares for reinvested divs. They may even do this at a discount, just as some corporations do with their DRIPs.
For example, a Nuveen prospectus reads:
The shares you acquire by reinvesting will either be purchased on the open market or newly issued by the Fund. If the shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at the greater of the net asset value or 95% of the then-current market price. If the shares are trading at less than net asset value, shares for your account will be purchased on the open market. If the Plan Agent begins purchasing Fund shares on the open market while shares are trading below net asset value, but the Fund’s shares subsequently trade at or above their net asset value before the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may invest the uninvested portion of the distribution in newly-issued Fund shares at a price equal to the greater of the shares’ net asset value or 95% of the shares’ market value on the last business day immediately prior to the purchase date, Distributions received to purchase shares in the open market will normally be invested shortly after the distribution payment date. No interest will be paid on distributions awaiting reinvestment.
“My” VHT Dividends reinvested @ $248.78 on 12/22/23.
That is a 0.15% worse price. Only one data point but I guess I am not transferring the shares to Vanguard!
If I were to go by Yogi’s post, Vanguard reinvests on the payment date. Does Vanguard deposit Div in your account on Day 1 and then take it out on Day 3 for settlement of reinvestment shares? If so, the cash balance at Vanguard between Day 1 and Day 3 can be misleading (overstated) and one can inadvertently overdraw their account. I like Fidelity’s process of reinvesting two days prior to the payment date which also gets one to participate two days early in the stock market that generally goes up overtime!
This is why I am somewhat obsessive about doing same day exchanges. I invest for the long term and am willing to put my faith in the market going up over a period of years. I do not accept exposure to daily random fluctuations.
It would be interesting to see the total return of investing in VHT two days before vs the day of distribution for each distribution date since the inception of VHT. I am fine if one were more interested in checking that out for SPY.
SPY operates on the same schedule as MDY, discussed above. Around six weeks between ex date and pay date. Compared with that, the two days (soon to be 1 day) between ex and record dates is noise. Not interested.
Almost surely a more important factor is how the various brokers acquire shares on the open market. Do they place orders at market open, do they try to get better prices during the day?
Maybe one can get a better reinvestment price by trading manually. Here Vanguard has an advantage over Fidelity.
At Vanguard, you can place an order without having funds (cash) available at the moment. You just need to get the cash into the account by settlement date. Fidelity won't let you do that.
Vanguard SPY trade preview message:
Important, please read
This purchase exceeds the current funds available balance. Funds are due in your settlement fund by the settlement date of the trade. Otherwise, securities in the account may be liquidated to pay for the purchase, and the account may be restricted.
[buttons to edit order or to continue placing order]
Fidelity SPY trade preview popup message:
(313012) The Estimated Order Value for this order exceeds your Cash Available to Trade.
Estimated Order Value: $470.00
Cash Available to Trade: $0.00
Committed to Open Orders: $0.00
100% of the order value is needed in cash. You must edit this order or increase your Cash Available to Trade by adding funds or closing positions before you can place this order.
Neither brokerage takes payment for order flow for ETF trades, so there's no difference there.
It would be interesting to see the total return of investing in MDY or SPY two days before vs the day of distribution (i.e., payment date) for each distribution date since the inception for MDY or SPY.
The above is not a brokerage contest. If it were, we do not need to worry about available funds balance because Fidelity buys two days before payment date in their DRIP program. In any case, I have margin privileges enabled at all brokerages so I can place buy orders without those restrictions. Everyone in my extended family and friends circle and many online friends have done the same as well.
Not interested in prove you wrong contests (or exercises), especially not on a Christmas Day. Interested in helping others if I can and seeking help where I need. I am living on borrowed time and shall leave such contests and exercises to the opulent.
I do not have any favorites: businesses, brokerages, or people.
It would be interesting to see the total return of investing in MDY or SPY two days before vs the day of distribution (i.e., payment date) for each distribution date since the inception for MDY or SPY.
Their dividends are effectively quarantined (uninvested) for six weeks before payment date.
The practice of quarantine, as we know it, began during the 14th century in an effort to protect coastal cities from plague epidemics. Ships arriving in Venice from infected ports were required to sit at anchor for 40 days before landing.
These UITs let cash sit idle for 40 days and 40 nights ex-div. Compared with that, an extra couple of days more or less is meaningless. Because of this extended (three fortnight) cash drag, I would not invest in these funds and have little interest in them.
Clearly YMMV. If you're really interested, all the data you need is available for downloading at Yahoo Finance.
Only one data point but I guess I am not transferring the shares to Vanguard! The above is not a brokerage contest.
Now I have 5 ETFs in my VG Brokerage a/c. My default is to reinvest when this option is available. So, it is interesting that VG is handling them differently.
ETF, Reinvestment, When Done? ICSH, ON, Pay Date USFR, ON, Pay Date CEFS, ON, Pay Date PYLD, ON, Not done (too new?) (div stays in core VMFXX) TCAF, option NA, NA (too new?) (div stays in core VMFXX)
When the VG reinvestment works as intended, the money doesn't flow through core VMFXX, but is directly aggregated and reinvested via a market-order on the Pay Date.
Comments
You can also turn on reinvestments for ETFs, but those are handled differently - depends on the ETF sponsor and the brokerage.
1. If the brokerage has a deal with the ETF sponsor, then, you may get a small discount on reinvestments, and reinvestments may be earlier.
2. More common is for the broker to handle this all by itself - it pools all reinvestment orders a few days AFTER the pay-date (that may be several days after the ex-div date) and executes a large market-order for its reinvesting clients.
Unfortunately, many charting services may incorporate reinvestments for BOTH mutual funds/OEFs and ETFs on the ex-div dates, so the ETF TRs shown may be a bit unrealistic.
Account & Trade/Account Features/Dividends & CGs - adjust.
I think you also get the option on purchases.
@bee, Vanguard follows #2 above.
Let us know if you were successful.
Remain curious,
Catch
It will take about 2 days after adding a new holding for it to show up, however. You can reinvest dividends from mutual funds, CEFs, ETFs & Stocks. But I have one ADR on which the option isn’t available (confirmed by a Fido rep).
Vanguard Dividend Reinvestment
https://investor.vanguard.com/client-benefits/dividend-reinvestment
"When reinvesting dividends, Vanguard Brokerage Services combines the cash distributions from the accounts of all clients who have requested reinvestment in the same security, and then uses that combined total to purchase additional shares of the security in the open market. Vanguard Brokerage will attempt to purchase the reinvestment shares on the payable date. The new shares are divided proportionately among the clients' accounts, in whole and fractional shares rounded to three decimal places. If the total purchase can't be completed in one trade, clients will receive shares purchased at the weighted average price paid by Vanguard Brokerage Services."
Example? Perhaps you're thinking of ETFs structured as UITs (e.g. SPY, QQQ). What UITs cannot reinvest are dividends from underlying equities and interest from underlying debt securities. https://www.federalregister.gov/d/2018-14370/p-145
In any case, this limitation refers to internal operation of the funds, not to how they can or cannot reinvest distributions.
So far, I've found no ETFs that reinvest distributions themselves. It seems that it is always the broker reinvesting dividends as a third party service, so that the investor doesn't have to do it manually. It's different " in Canada where some ETF sponsors offer DRIPs.
Even there, the ETF is not issuing new shares but always buying them on the open market. So the ETF is just playing the role of the third party broker and not really acting as the issuer of shares. For example, with Vanguard Canada ETF DRIPs, https://www.vanguard.ca/en/investor/products/resources-group/drip
If the brokerage has a deal with the ETF sponsor, then, you may get a small discount on reinvestments, and reinvestments may be earlier.:
This statement sounds like true stock DRIPs that may give small discounts on stocks acquired directly from a company. But that doesn't seem likely with ETFs, as they issue new shares only to authorized participants (APs) in large blocks (creation units). And I haven't been able (yet) to find an ETF DRIP (not involving the broker) in the US.
Getting back to UITs, I'm not sure I'd take the Vanguard page on dividend reinvestment too literally. It reads in part: That would seem to make SPY and QQQ ineligible for dividend reinvestment at VBS.
I will check both and get back to you.
“My” VHT Dividends reinvested @ $248.78 on 12/22/23.
2 points:
1. Reinvestment by Vanguard was on the pay-date near the close. It may be later by other firms.
2. Most chart services (StockCharts, Stock Rover, PV, M*, etc) likely assume reinvestment on ex-div date at ex-div price that is impossible in practice for ETFs. So, that is a source of small errors in the ETF charts. Keep this in mind for comparisons with VG index OEF classes or the OEF cousins by other firms.
From the SPDR S&P 400 ETF (MDY) prospectus: https://doc.morningstar.com/docdetail.aspx?key=84b36f1bf3830e07&cusip=78467Y107
This year, MDY went ex on Dec 15th, with a pay date of Jan 31, 2024. Reinvestment cannot come before dividend is paid. Talk about a cash drag! (MDY is a UIT).
From a M* ETF data definition page: https://awgmain.morningstar.com/webhelp/glossary_definitions/indexes/etfsnapshot.htm
But what is that actual reinvestment price? Here's a Bogleheads thread where a Fidelity customer rep is reported as having said: https://www.bogleheads.org/forum/viewtopic.php?t=129006
As someone in that thread pointed out, the three days came from T+3 trading, which is now T+2. The cash needs to be available on the reinvestment settlement date.
Closed end funds are different. They may have legitimate DRIPs, where the funds themselves issue new shares for reinvested divs. They may even do this at a discount, just as some corporations do with their DRIPs.
For example, a Nuveen prospectus reads: https://www.sec.gov/Archives/edgar/data/1608741/000119312520064802/d849460dncsr.htm#tx849460_15
Back when broker-simulated DRIPs were new (when only Schwab offered them), one might need to hold a CEF personally, not in street name, in order to participate. At least that's what it says in this NYTimes article. Interesting piece, though things may have changed.
https://www.nytimes.com/1995/01/14/archives/dividends-a-reinvesting-hitch-in-closedend-funds.html
If I were to go by Yogi’s post, Vanguard reinvests on the payment date. Does Vanguard deposit Div in your account on Day 1 and then take it out on Day 3 for settlement of reinvestment shares? If so, the cash balance at Vanguard between Day 1 and Day 3 can be misleading (overstated) and one can inadvertently overdraw their account. I like Fidelity’s process of reinvesting two days prior to the payment date which also gets one to participate two days early in the stock market that generally goes up overtime!
That's correct on an annual basis. And the odds get even better over longer periods of time.
Source: https://www.capitalgroup.com/individual/planning/investing-fundamentals/time-not-timing-is-what-matters.html
But on a day to day basis, the odds are barely better than break even that the market will go up:
Source: https://www.financialsamurai.com/average-daily-percent-move-of-the-stock-market/
This is why I am somewhat obsessive about doing same day exchanges. I invest for the long term and am willing to put my faith in the market going up over a period of years. I do not accept exposure to daily random fluctuations.
Almost surely a more important factor is how the various brokers acquire shares on the open market. Do they place orders at market open, do they try to get better prices during the day?
Maybe one can get a better reinvestment price by trading manually. Here Vanguard has an advantage over Fidelity.
At Vanguard, you can place an order without having funds (cash) available at the moment. You just need to get the cash into the account by settlement date. Fidelity won't let you do that.
Vanguard SPY trade preview message: Fidelity SPY trade preview popup message: Neither brokerage takes payment for order flow for ETF trades, so there's no difference there.
The above is not a brokerage contest. If it were, we do not need to worry about available funds balance because Fidelity buys two days before payment date in their DRIP program. In any case, I have margin privileges enabled at all brokerages so I can place buy orders without those restrictions. Everyone in my extended family and friends circle and many online friends have done the same as well.
Not interested in prove you wrong contests (or exercises), especially not on a Christmas Day. Interested in helping others if I can and seeking help where I need. I am living on borrowed time and shall leave such contests and exercises to the opulent.
I do not have any favorites: businesses, brokerages, or people.
These UITs let cash sit idle for 40 days and 40 nights ex-div. Compared with that, an extra couple of days more or less is meaningless. Because of this extended (three fortnight) cash drag, I would not invest in these funds and have little interest in them.
Clearly YMMV. If you're really interested, all the data you need is available for downloading at Yahoo Finance.
Now I have 5 ETFs in my VG Brokerage a/c. My default is to reinvest when this option is available. So, it is interesting that VG is handling them differently.
ETF, Reinvestment, When Done?
ICSH, ON, Pay Date
USFR, ON, Pay Date
CEFS, ON, Pay Date
PYLD, ON, Not done (too new?) (div stays in core VMFXX)
TCAF, option NA, NA (too new?) (div stays in core VMFXX)
When the VG reinvestment works as intended, the money doesn't flow through core VMFXX, but is directly aggregated and reinvested via a market-order on the Pay Date.