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How Do ETF Distributions Work? Top 15 Questions Answered

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ETF distributions can often be a source of confusion. At the end of every financial year, when ETF distributions are paid, we receive many questions about how they work. In this article, we answer some of the most common questions. Those wanting to speak with us can always call us on (02) 8311 3488.

Top 15 Questions

  1. What is an ETF distribution?

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

  3. Why would I elect for a DRP rather than take distributions as cash?

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

  5. When do I get my ETF distributions?

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

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

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

  9. How are distribution reinvestment plans implemented?

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

  11. How can I know how the size of a distribution? Where do I find my ETF tax information?

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

  13. Why do some ETFs not pay distributions?

  14. What process does ETF Securities have to manage distributions?

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 the ETF. The alternative to this is to receive your 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 – 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 Computershare, 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 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 ASX’s website. On the payment date, investors will receive the 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.

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To give an example (screenshot above), the ETFS 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 ETF Securities and manages the communication between ETF Securities 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?