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Why did my ETF fall in value last week?

Lewis Jackson  |  06 Jul 2021Text size  Decrease  Increase  |  
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Investors were treated to a lesson in fine print as several popular international ETFs fell sharply with the end of financial year.

BlackRock’s international ESG leaders ETF (ASX: IWLD) fell 11.3 per cent last Thursday as the fund went “ex-distribution”. ETF Securities' Battery Technology ETF (ASX: ACDC) similarly fell 5.4 per cent.

ETFs distribute earnings to unit holders at several points in the year. After funds go “ex-distribution” the price falls by a similar amount to reflect the value that has been transferred to unit holders.

Vanguard’s Australian Shares ETF (ASX: VAS) and BetaShares Global Sustainability Leaders (ASX: ETHI) also fell as the funds distributed earnings. They were down 1.1 per cent and 4.7 per cent, respectively.

This is IWLD’s first distribution since BlackRock’s changed the benchmark index from “World All Cap” to “World ESG leaders”.

What happened

Distributions are how ETFs return earnings to investors. They can be dividends, franking credits, realised capital gains, interest and foreign income, depending on the ETF’s securities, says Kanish Chugh, head of distribution at ETF provider ETF Securities.

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In an equity ETF, when holdings pay dividends or are sold for capital gains, this is periodically returned to investors as a distribution.

Capital gains are usually accrued when equity ETFs rebalance their holdings. Rebalancing occurs when ETFs buy and sell shares to keep the fund aligned to the index it tracks.

Distributions can be paid in cash directly to investors or many ETFs offer dividend reinvestment plans where earnings are recycled directly into new units.

Many ETFs distribute semi-annually. Dividend and yield focused ETFs may distribute more frequently, on a monthly or quarterly basis.

Tax and distributions

In theory, price changes resulting from distributions leave unit holders no worse off. The fall in unit price should be offset by the distribution received.

New unit holders in turn receive a price discount in exchange for buying “ex-distribution”.

But the timing of unit purchases and distributions can have tax implications for investors.

Investors who buy prior to a distribution—“cum-distribution”—are liable for income tax on the distribution. But having bought at a higher price, their future capital gains liability may be lower.

Buying ex-distribution avoids the income tax liability but a lower starting price may mean a higher capital gains tax liability later.

Making a decision about when to buy comes down to an individual's tax situations, says Chugh.

“It really comes down to how investors will receive their distribution,” he says.

“The net outlay could be quite similar buying cum or ex-distribution, but investors need to decide based on their own tax situation.”

Tax liabilities can be impacted by franking credits, where ETFs own Australian equities, and overseas withholding taxes where the ETF owns foreign equities.

Australians buying US domiciled ETFs will incur a 30 per cent dividend withholding tax but are eligible to reclaim a portion as a foreign tax credit after completing a W8BEN form.

Investors who still feel confused about the sudden price changes which can follow distributions should get in touch with their fund, says Chugh.

“Investors should feel free to pick up the phone and talk to providers about what is going on,” he says.

“Those who have had a distribution are not necessarilly losing assets as they might see on screen. Whether they’ve nominated to receive it as cash or use a DRP, it’s still there for them.”

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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