How Do ETF Distributions Work? Top 15 Questions Answered

ETF distributions can often be a source of confusion. We answer some of the most common questions on this topic.

1. What is an ETF distribution?

ETFs like many other investment options pay distributions. But why? Well, if the underlying companies that an ETF holds pay dividends, these are paid directly into the fund. The ETF collates all forms of income within the fund and pays this out to the investor as part of a regular distribution. These forms of income include:

• Dividends – received from the underlying stocks in the fund
• Interest – from any cash in the fund
• Capital gains – received from the sale of underlying stocks at rebalance
• Franking credits – from any franked Australian shares
• Foreign income – if the fund has international stocks and received any foreign tax credits

2. What is a distribution reinvestment plan (DRP)?

A DRP enables investors to elect to have their cash distribution re-invested and receive new units in that ETF. This is an alternative to receiving distributions as a cash payment

3. Why would I elect for DRP rather than taking my distributions as cash?

By opting into a DRP, you will increase the number of units you hold in the underlying fund without having to outlay cash to buy more. In addition, there is no brokerage fee for the purchase of new units in the fund via a DRP. Conversely, you may want to elect to receive cash for personal expenses or tax purposes.

4. What is the cut-off date to receive an ETF distribution?

To receive a distribution, you must own the ETF, that is the trade must have fully settled, before the record date. This means that you should aim to buy an ETF at least two business days before the record date (as ETF trades take two business days to settle) should you wish to receive a distribution. The record date is the date on which the share registry records who owns which ETFs and therefore who is entitled to distributions. ETFs with multiple distributions will have multiple record dates throughout the year. They usually occur just before the end of the quarter. We discuss the example of Global X S&P 500 High Yield Low Volatility ETF (ZYAU) below.

5. When do I get my ETF distributions?

Distributions are paid on the payment date, which is announced ahead of time on the relevant exchanges website. On the payment date, investors will receive cash, or new ETFs, if they chose to reinvest their distributions. They will also receive franking credits. Different ETFs will have different payment dates and frequencies. Details are available on the websites for each fund.

To give an example (screenshot above), the Global X S&P/ASX 300 High Yield Plus ETF (ASX Code: ZYAU) pays a distribution every quarter, which varies in size. On 18 January 2022, it paid a 3.56306 cent distribution on every unit. And provided a franking level of 33.0535%. To receive this dividend, investors had to own their units in ZYAU on 4 January 2022, the record date.

6. How do I choose to participate in a distribution reinvestment plan?

Computershare is the share registry used by Global X and manages the communication between Global X and our investors. Investors can log into Computershare’s website and elect to reinvest their distributions. This is available on https://www-au.computershare.com/investor/

We have a step-by-step guide how to use Computershare available here.

7. What price do you get when you participate in a distribution reinvestment plan?

Distributions reinvest at the closing Net Asset Value (NAV) price on the ex-distribution date, sometimes called the “ex-date”. Distribution reinvestment plans incur no brokerage fees or trading slippage, meaning the full distribution is reinvested.

8. Why does the ETF price drop on the ex-distribution date?

On the ex-date, ETF prices will fall by an amount approximately equal to their distribution. This happens because on the ex-date, the distribution money owed to investors is removed from the fund. This causes the NAV of the fund to fall, and by extension the price.

Please note: investors are not harmed by ex-date price drops. This is because ex-date price drops should roughly equal the value of the distribution they receive. As such, the distribution should offset the ex-date price drop, all else being equal.

Please note further: When distributions are large, ex-date price drops can be large as well. A good example of this was the Global X Ultra Long Nasdaq 100 Hedge Fund (ASX Code: LNAS) in 2021. On the 30 June 2021 ex-date, the price of LNAS fell from $17.91 down to $11.35 – a drop of $6.56, or 37%.

This drop, while frightening for some unitholders at the time, was completely offset by a distribution payment of $6.83.

9. How are distribution reinvestment plans implemented?

For those who choose to reinvest their distributions, Global X ensures that investors receive newly-created units in the fund not cash. Computershare informs Global X how many investors have chosen to reinvest their distributions. We then create new units of the ETF investors who chose reinvestment, based on information we receive from Computershare. Investors then receive their new units on the payment date.

10. What happens to leftover cash from dividend reinvestment plans?

Those opting to reinvest dividends will usually have some leftover cash at the end of each distribution period – that wasn’t quite enough to buy another unit. This leftover cash will be carried forward to the next distribution payment and held by the fund until then.

11. How can I know the size of a distribution?

ETF providers, like Global X usually give a forecast – which is subject to revision – of how big they expect a distribution to be one week prior to the ex-date. This forecast is made public on the announcement date. While these forecasts tend to be accurate, however they are estimates and are subject to corrections and revisions.

12. Where do I find my ETF tax information?

Tax information is provided on the fund pages of all of our ETFs. The taxes that investors pay on each distribution will depend on the individual’s tax circumstance. Investors should always ensure that they have their tax details up to date with their broker, accountant and with Computershare. Investors should always seek tax advice from licensed tax professionals.

13. Why doesn’t my broker allow me to reinvest my ETF distributions?

Some brokers do not use CHESS, the custody system maintained by the ASX. CHESS works with the registry to track and communicate with investors—including on distribution reinvestment. Some brokers opt to be the custodian instead. These custodial brokers often do not provide dividend reinvestment as investors will not be plugged into the registry.

14. Why do some ETFs not pay distributions?

Whether an ETF pays a distribution or not will be determined by the assets that it holds. ETFs that own bonds, or dividend-paying shares will pay distributions. Whereas ETFs that own commodities – such as our physical gold, silver, platinum, palladium, and precious metals – will not pay distributions. As such they do not generate income, there is no distribution.

15. What process does Global X have to manage distributions?

As ETFs are typically Attribution Managed Investment Trusts (AMIT), Global X has discretion over how large or small the distributions can be. We can manage the size of distributions in relation to what we think investors needs might be.